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Foreign market entry mode
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Developing the Industry Internationalisation model Kristianstad University Department of Business Studies Authors: Patric Hammarlund David Hansson Viktor Hansson International Business Program Bachelor Dissertation
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Abstract The research on internationalisation goes back a long time. Despite this, there
exist no theories on how different industries enter new markets, and by which
mode of entry. This dissertation attempts to develop a model with the purpose to
explain the differences in foreign market entry mode decision between industries.
In order to describe these differences, the foundations of our model are the
relative degree of firm specific assets and the need of local representation, and if
the industry use the firm specific asset internally or externally.
The suggested model is based upon concepts of prior theories on
internationalisation, with a focus on Dunning´s Eclectic Paradigm. What
separates the proposed model from the Eclectic Paradigm is the need of local
representation, which differences are of great importance of different industries.
The Uppsala Internationalisation model and Transaction Cost Analysis were also
contributing in the development of the model. Propositions were created on each
industry to test the validity of the model and the presumed entry mode decision. As
this dissertation used a deductive approach, the model was developed by existing
theories of internationalisation and then tested empirically by an internet-based
questionnaire on companies on the Swedish stock market.
The result demonstrated the applicability of the model. In addition, the analysis
contains a detailed description of the findings on each industry, and summarises
the model with a combined result. Finally, the conclusions are presented to
summarise the work, the practical implementations and suggestions for further
research.
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Foreword Kristianstad, November 2007
The bachelor dissertation is the second last assignment before our graduation from
Kristianstad University. We have experienced both ups and downs during our
work with the dissertation, and are now pleased that it is finished. We found the
key for a good result to be hard work, good cooperation and communication. Most
of all, we have gotten to test our knowledge in business and found that it is
sufficient.
We would like to thank our tutors, Håkan Pihl and Timurs Umans, for their
patience and support during the process. A special thanks to Annika Fjelkner
whose contributions saved us. We would also like to thank the people from the
business world that we interviewed, all participants in our questionnaire, and to
our families whose support and proofreading were invaluable. Finally, a great
thank you to Martin Hansson´s whose expertise made the webpage perfect.
Patric Hammarlund David Hansson Viktor Hansson
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Table of Contents
1. Introduction
1.1 Background.............................................................................................. 7
1.2 Problem.................................................................................................... 8
1.3 Purpose..................................................................................................... 8
1.4 Research questions................................................................................... 8
1.5 Outline...................................................................................................... 9
2. Methodology
2.1 Choice of methodology............................................................................ 11
2.2 Scientific approach....................................................................................11
2.3 Secondary Data: Choice of theory............................................................12
2.4 Primary data..............................................................................................13
3. Theoretical framework
3.1 Introduction.............................................................................................. 14
3.2 Choice of theory....................................................................................... 14
3.3 Uppsala Internationalization Model......................................................... 15
3.4 Transaction Costs Analysis...................................................................... 23
3.5 Eclectic Paradigm..................................................................................... 28
3.6 Modes of entry.......................................................................................... 32
3.6.1 Exporting entry modes................................................................. 32
3.6.2 Contractual entry modes.............................................................. 33
3.6.3 Investment entry modes............................................................... 35
3.7 Summary...................................................................................................36
4. Creating an alternative model
4.1 Introduction.............................................................................................. 38
4.2 Scientific influences – Deciding factors in the model..............................38
4.3 A new approach - The Industry Internationalisation model..................... 39
4.4 Summary...................................................................................................43
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4.5 Propositions...............................................................................................45
4.5.1 Finance and properties..................................................................46
4.5.2 Materials.......................................................................................47
4.5.3 Healthcare.....................................................................................49
4.5.4 Consumer discretionary................................................................50
4.5.5 Industrials..................................................................................... 52
4.5.6 Service..........................................................................................54
4.5.7 Transport...................................................................................... 56
4.5.8 Information technology................................................................ 58
4.5.9 Energy.......................................................................................... 59
4.6 Conclusion................................................................................................ 60
5. Empirical Method
5.1 Research strategy...................................................................................... 62
5.2 Data collection method............................................................................. 63
5.3 Sample selection....................................................................................... 63
5.4 The Questionnaire.....................................................................................64
5.5 Response rate............................................................................................ 65
5.6 Operationalization.................................................................................... 65
5.7 Analysis of the material............................................................................ 67
5.8 Validity & Reliability................................................................................67
5.8.1 Validity.........................................................................................67
5.8.2 Reliability..................................................................................... 68
6. Analysis
6.1 Introduction.............................................................................................. 69
6.2 Finance..................................................................................................... 70
6.3 Materials................................................................................................... 72
6.4 Healthcare................................................................................................. 75
6.5 Consumer discretionary............................................................................ 78
6.6 Building................................................................................................... 82
6.7 Manufacturing.......................................................................................... 86
6.8 Service...................................................................................................... 89
6.9 Transport.................................................................................................. 93
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6.10 Information Technology......................................................................... 96
6.11 Energy.................................................................................................. 100
6.12 Conclusion/Summary........................................................................... 103
7. Conclusion
7.1 Summary of the dissertation................................................................. 107
7.2 Applicability of the model..................................................................... 108
7.3 Modifications......................................................................................... 110
7.4 Methodological criticism....................................................................... 111
7.5 Future research....................................................................................... 112
7.6 Practical implementations...................................................................... 113
Sources............................................................................................................... 114
List of Figures Figure 3.1: The Establishment chain
Figure 3.2: Internationalisation of the company: an incremental approach
Figure 3.3: Mechanisms of internationalisation, state and change aspects
Figure 3.4: A Schematic Representation of Entry Choice Factors
Figure 4.1: The Industry Internationalisation model
Figure 4.2: The Industry Internationalisation model with industries
Figure 6.2.1: The predicted/actual entry mode in the finance industry
Figure 6.2.2: The suggested/actual entry mode in the finance industry
Figure 6.3.1: The predicted/actual entry mode in the material industry
Figure 6.3.2: The suggested/actual entry mode in the material industry
Figure 6.4.1: The predicted/actual entry mode in the healthcare industry
Figure 6.4.2: The suggested/actual entry mode in the healthcare industry
Figure 6.5.1: The predicted/actual entry mode in the consumer discretionary
industry
Figure 6.5.2: The suggested/actual entry mode in the consumer discretionary
industry
Figure 6.6.1: The predicted/actual entry mode in the building industry
Figure 6.6.2: The suggested/actual entry mode in the building industry
Figure 6.7.1: The predicted/actual entry mode in the manufacturing industry
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Figure 6.7.2: The suggested/actual entry mode in the manufacturing industry
Figure 6.8.1: The predicted/actual entry mode in the service industry
Figure 6.8.2: The suggested/actual entry mode in the service industry
Figure 6.9.1: The predicted/actual entry mode in the transport industry
Figure 6.9.2: The suggested/actual entry mode in the transport industry
Figure 6.10.1: The predicted/actual entry mode in the IT industry
Figure 6.10.2: The suggested/actual entry mode in the IT industry
Figure 6.11.1: The predicted/actual entry mode in the energy industry
Figure 6.11.2: The suggested/actual entry mode in the energy industry
Figure 6.12.1: The initial Industry Internationalisation model
Figure 6.12.1: The final Industry Internationalisation model
List of Tables
Table 3.1: Summary of the three theories
Table 4.1: Basics of the Industry Internationalisation model
Table 5.1: Results of the questionnaire
Table 6.2.1: Result from the finance industry
Table 6.3.1: Result from the material industry
Table 6.4.1: Result from the healthcare industry
Table 6.5.1: Result from the consumer discretionary industry
Table 6.5.2: Statistical analysis of the consumer discretionary industry
Table 6.6.1: Result from the building industry
Table 6.6.2: Statistical analysis of the building industry
Table 6.7.1: Result from the manufacturing industry
Table 6.7.2: Statistical analysis of the manufacturing industry
Table 6.8.1: Result from the service industry
Table 6.9.1: Result from the transport industry
Table 6.10.1: Result from the IT industry
Table 6.10.2: Statistical analysis of the IT industry
Table 6.11.1: Result from the energy industry
Appendix
Appendix 1: Cover letter and questionnaire.......................................... 117
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Chapter 1: Introduction ________________________________________________________ In the first chapter, we will present the background, problem and purpose of our
dissertation. We will present the research questions and briefly discuss the
limitations of our approach. In the end of this chapter we show the outline of the
dissertation.
1.1 Background
To find a subject for our dissertation we started to think about what we thought
had been most interesting during our time at Kristianstad University. As
international business students we have always been fascinated by how and why
companies enter new markets. We wanted to look further into which mode of
entry companies in Sweden prefer to use in different regions, and what factors
affect their choice of entry mode. The focus will be on different industries, and if
we can see a pattern in their choice of entry mode.
There are several theories that cover the internationalisation of companies. The
theories are often well known and widely accepted by researchers and business
practicians. Even if business is constantly evolving, these theories are so well
developed that they still describes internationalisation accurately and can be used
to develop new theories to describe future ways of internationalisation. The
theories are often very specific why companies pursue international trade and
relations, reasons for internationalising, which entry modes that exist and
especially what factors that influence company leaders’ decisions to
internationalise. However, when reviewing these theories and reading business
literature and scientific business articles, we believe that researchers often refer to
companies as a universal unity and not reflecting over that companies are
different. Researchers often have several good arguments for factors that influence
the companies’ decisions but they often fail to mention that factors affect
companies differently. We will therefore examine if you can relate
internationalisation factors and choice of entry mode to different industries.
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We will start our dissertation by reviewing relevant articles by researchers to
examine which theories and models exists. We will investigate which entry modes
exist and which factors that influence companies. We will try to create a model
that explains the companies’ choice of entry mode in different industries. Finally,
we will then conduct a survey on Swedish SMEs through an internet-based
questionnaire to find out what mode of entry they prefer.
1.2 Problem
Factors which influence companies in the internationalisation process often differ
between companies. Not all factors are equally important to all companies.
Companies from different industries have different impediments and opportunities
which make them evaluate these factors differently. These factors might play an
essential role when company leaders choose a foreign market entry mode. Even if
some researchers acknowledge these differences, the problem is the absence of
models and theories that explain why some entry modes are more common and
why some factors are more important in a certain industry.
1.3 Purpose
The purpose of our dissertation is to see if there are any differences in the choice
of entry mode between industries. If there are differences, we will try to explain
them and analyse why they exist. We will examine if there are any existing
theories that can explain the relation between choice of entry mode and industry.
The purpose is also to develop and test a model that we have created on our own
which describes why the choice of entry mode differs between industries.
1.4 Research questions
We have based our research on five research questions:
• What models or theories are used to explain the choice of foreign market
entry mode?
• Which factors is most determent for companies’ choice of entry mode?
• How do these factors affect companies in different industries?
• Are there any differences in the industries’ choice of entry mode?
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• Can a theory or model be created that describes industries’ choice of
different modes of entry?
1.5 Limitations
The research was limited to small and medium sized companies depending on the
resources and time of the researchers. Naturally, we cannot examine companies
all-around the world, therefore we have limited our research to companies in
Sweden since we all live in Sweden. Another limitation is time, and we are not
able to review all research articles that cover this area of business which may lead
to us missing some important articles.
1.6 Outline
Chapter 2: Method
In this chapter the choice of methodology and scientific approach are discussed.
The chapter will present how primary data and secondary are collected. In
addition, it contains a presentation of the chosen theories.
Chapter 3: Theoretical framework
Chapter 3 will present well-known theories from acknowledge researchers that
describes how companies internationalise. The theories discuss factors and
problems that affect companies’ choice of foreign entry mode. These theories
constitute the basis of our dissertation and are used to create a new model that
describes industries choice of foreign market entry mode. Finally, it will describe
the entry modes.
Chapter 4: Creating an alternative model
In this chapter we will present an alternative model based on previous mentioned
theories. The model will show which entry mode is the most preferred and used
by companies in different industries. The model is based on theories and
industries’ predicted choice of entry mode and motivated with propositions that
will be presented.
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Chapter 5: Empirical method
In chapter 5 the method for the empirical research will be explained. This will
include the research strategy, the data collection method and the sample. Further,
we will discuss the questionnaire, the operationalization and the data analysis. At
the end the reliability and validity will be discussed.
Chapter 6: Analysis of the survey
In chapter 6 each industry will be analysed separately. By using the results from
the questionnaire and comparing it to the propositions we will see if the
propositions and the industry internationalisation model are working. At the end
of this chapter we will have a final presentation of the model and if it had to be
configures.
Chapter 7: Conclusion
In the last chapter the dissertation will be summarised. The applicability of the
industry internationalisation model is discussed. In addition, criticism to the
methodology will be presented together with modifications, practical
implementations and future research.
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Chapter 2: Methodology ________________________________________________________ In this chapter the choice of methodology and scientific approach are discussed.
The chapter will present how primary data and secondary are collected. It also
contains a short presentation of the choice of theory.
2.1 Choice of methodology
The purpose of our dissertation is to look at how different industries
internationalise, and what factors affect their choice of entry mode. We started by
studying previous research on foreign market entry mode, and traditional theories
on internationalisation. We found that no complete theories on industries existed,
even though different parts from different theories were applicable. However,
when well-established theories on a subject exist, a deductive approach is more
adaptable than an inductive approach. Saunders et al. (2007) clarifies the
difference: “your research should use the deductive approach, in which you
develop a theory and hypothesis (or hypotheses) and design a research strategy to
test the hypothesis, or the inductive approach, in which you would collect data and
develop theory as a result of your data analysis” (Saunders et al. 2007 p 117).
From the theories we created our own model which we thought could explain how
industries enter new markets. The next step was to test the model, which we did
by conducting an internet-based survey. We will base an analysis on the results of
the survey, and the result will also either confirm or contradict our model.
2.2 Scientific approach
The point of view in which you write a dissertation is called the scientific
approach. It could be divided in three parts, each with different approaches:
1. Research philosophy: there are three different research philosophies to be
chosen when writing a dissertation: positivism, realism, or interpretivism.
We have chosen a positivistic approach. When using a positivistic
approach the researcher tries to be objective, and collects data in a value-
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free way. The aim is to be independent; not trying to be affected or you
affect the research. Since we study entire industries the purpose is to
generalise our findings, which you try in a positivistic approach. However,
the difference to a realistic approach is minimal when the objective is to
study the behaviour of a company (Saunders et al. 2007).
2. Quantitative or qualitative data: when studies are quantitative the collected
data could be expressed in numbers and figures, and being statistically
measurable. Qualitative studies are researches where the collected data
could not be quantified and measured in that manner, the focus is more on
understanding. We chose a quantitative approach by conducting a
standardized questionnaire that was the same for all participants. When
doing it this way, the result could be analysed and correlated by using
statistical programs (Saunders et al. 2007).
3. Explanatory or exploratory purpose: an exploratory purpose tries to find
out “what is happening; to seek new insights; to ask questions and to asses
phenomena in a new light” (Robson 2002; cited in Saunders et al. 2007).
An explanatory study tries to explain the relationship between different
variables. We have chosen an exploratory purpose as we try to analyse
the internationalisation process in a new way.
2.3 Secondary Data: Choice of theory
When reviewing the topic and explanation of internationalisation many theories
and models came across. Some theories are more acknowledged than others, and
the majority of the theories have extensions by other authors. However, a pattern
of the most commonly used theories could be seen. In addition, in alignment with
our research purpose, we have chosen the theories that we think could be used to
explain the way different industries enter new markets. The theories that we have
chosen are:
• The Uppsala internationalisation model: This is a classic
internationalisation theory. The theory has its emphasis on that a company
gradually extends its activities abroad over time and as knowledge
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develops, and with that the physical distance to markets increases
(Johanson and Vahlne, 1977).
• Transaction cost analysis (TCA): This model was developed initially by
Coase (1937), and further improved by Williamson (1971). The focus is
on the costs of a foreign market entry mode comparative to its objective,
what is most efficient and economical (Anderson and Gatignon, 1986).
• The Eclectic Paradigm: The firm´s advantages in organisation, location
and internationalisation of processes influence the choice of foreign
market entry mode (Dunning, 1980).
Some of the most important sources in our theoretical framework were articles
written by the creators of the specific theories. In addition, we have also studied
literature from researchers that have analysed the theories further, and some of the
most important extensions.
2.4 Primary Data
We created a webpage on which we published a questionnaire. The purpose was
to test the model we had developed, and the questions in our survey were linked to
the model. The reason why we chose an internet-based survey was to emphasise
the anonymity of the participant, hoping this would increase the number of
participants. The online questionnaire makes is possible for the participants to
decide themselves when to answer. Additionally, the questionnaire could be
interlinked with a program (Excel) making it easier to analyse the results. A letter
was sent out to 266 companies on Mid cap, Small cap and First North1 on the
Swedish stock market, with a link to the webpage www.modeofentry.com. On the
webpage, the participants could read information about the writers of the
dissertation and their background. To get a high response rate a follow-up letter
was sent one week after the first letter. To strengthen our model we also
conducted personal interviews with present and former high-level executives in
different industries (see chapter 5 for details). 1 The Mid Cap, the Small Cap and the First North are lists on the Swedish stock market. The lists contain
small and medium sized companies located in Sweden.
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Chapter 3: Theoretical framework ________________________________________________________ In this chapter we will present the theoretical framework. It will present well-
known theories from acknowledge researchers that describes how companies
internationalise. The theories discuss factors and problems affecting companies’
choice of foreign entry mode. These theories constitute the basis of our
dissertation and are used to create a new model that describes industries´ choice
of foreign market entry mode. In the end we describe different entry modes.
3.1 Introduction
Over the years there have been several theories that try to explain how and why
companies internationalize. Since Adam Smith published his book “The Wealth of
Nations” in 1776, which was first with the conclusion that countries would benefit
from trade, several researchers have develop models and theories that could help
to analyse the reasons and benefits of international trade. Some of the most
acknowledged researchers such as Adam Smith, David Ricardo and Raymond
Vernon all have contributed to the research of trade but even if these researchers’
theories still have many valid points, we have focused our theoretical review on
some newer models. Also, Smith‘s, Vernon’s and Ricardo’s theories explain the
advantage of trade and reasons for firms to internationalize but since we want to
explain how (which entry mode they use) firms internationalize, we have chosen
three different models that are well-known. The three models we have chosen
were created some years ago and have had the time to be reviewed, analyzed and
tested several times. These theories are highly regarded by researchers and are
considered to describe the entry mode decision and affecting factors well. We will
present the models and their key-points and in the end discuss some limitations of
the models.
3.2 Choice of theory
Many researchers have discussed how and why companies choose a certain entry
mode. Pan and Tse (2000) states that there are three main schools in this subject.
The first school, which consists of researchers such as Johanson and Vahlne, sees
operations in foreign markets as risky. They consider the political and cultural
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differences between countries and prefer a moderate initial commitment when
doing business abroad. They want companies to gradually increase their
commitment as they acquire knowledge and experience in that market.
Researchers from first school prefer that companies enter new markets with a low
risk entry mode such as export and with time increase their involvement by
choosing an entry mode with higher commitment (Pan & Tse 2000).
The second school analyse the transaction cost phenomena. Researchers state that
companies will internalize operations that it can perform at a low cost and let
others perform activities that can be done at lower cost elsewhere (externalize).
When a company externalize their activities transaction costs will occur. These
costs include amongst other cost of monitoring, controlling and inspecting
suppliers and products. The second school’s advocates assume that managers
consider all entry modes at the same level and that all factors are of equal
importance (Pan & Tse 2000).
The third school of thought focus much on location specific factors. John Dunning
is one of the most prominent researchers in this area. He state that companies’
entry mode decisions rest on three factors, ownership-, location- and
internalisation factors. He calls attention to location factors as he believes them to
have an increasing affect to managers’ entry mode decisions (Pan & Tse 2000).
The three theories we have chosen all have some affiliation to one of the three
schools. For instance, the Uppsala internationalisation model belong to the first
school researchers and the eclectic paradigm belongs to Dunning from the third
school. We will now present the theories and we will return to this discussion later
in chapter four when we will create an alternative model that highlight industries
entry mode choice.
3.3 The Uppsala Model
During the 1970s two Swedish researchers, Johanson, Vahlne and Wiedersheim-
Paul, at the University of Uppsala in Sweden studied the internationalisation
process of companies. They created a model to explain the internationalisation
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process of firms; and named it the Uppsala model. The model has its theoretical
base in the behavioural theory of the firm (Cyert & March, 1963; Aharoni, 1966).
The Uppsala model focuses on gradual integration, acquisition and use of
knowledge about foreign markets and operations, and on incrementally increasing
commitments to foreign markets (Johanson & Vahlne, 1977). An important aspect
of the model is that it is a dynamic model; it describes the internationalisation of a
firm as a process. This process is expressed in the model through psychic distance
and the establishment chain of the firm; these will be discussed more lately. The
process evolves with interplay between the development of knowledge about the
foreign markets and operations, and an increasing commitment of resources to
those markets (Johanson & Vahlne, 1990, in Johansson et al, 1994). The model
tries to explain that firms internationalize when they learn more about new
markets.
Assumptions in the Uppsala model
-The establishment chain and the psychic distance
As mentioned earlier, the process in the Uppsala model is expressed by psychic
distance and the establishment chain (Johanson & Vahlne, 1990, in Johanson et al,
1994). These patterns were noticed when the Swedish researchers studied the
internationalisation process for a number of Swedish companies. The first pattern,
the establishment chain, means that a company commits to engage in operations in
a certain foreign country through small incremental steps. For every new step the
commitment increases. The researchers could see that the companies started with
exporting and with time they started using sales organisations and in the end their
own manufacturing operations. The establishment chain is illustrated in figure 3.1:
Figure nr 3.1: The Establishment chain
(Source: Own model, based on Johanson and Wiedersheim-Paul, 1975, in
Johanson et al, 1994)
Sporadic export
Agent Sales subsidiary
Production
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The second pattern identified was psychic distance. Firms tend to enter new
markets with successively greater psychic distance which often also mean greater
geographical distance (Johanson & Vahlne, 1990, in Hollensen, 2001). Psychic
distance can be defined as the sum of factors preventing the flow of information
from and to the market. Examples are differences in language, education, business
practices, culture, and industrial development (Johanson & Vahlne, 1977). The
less knowledge a company has about the market the greater the psychic distance
and the uncertainty are. This is why companies enter new market where psychic
distance and perceived uncertainty is low, often because these markets are easier
to understand. When you understand a market it is easier to see opportunities. The
best way to gain an understanding and utilize the opportunities of a new market is
through experiential knowledge, learned through personal experience in the
specific market. Figure 3.2 combines the two patterns, the establishment chain and
physic distance, in a model:
No regular export
(sporadic export)
Independent representative (export modes)
Foreign sales
subsidiary
Foreign production and sales
subsidiary
Market A
Market B
Market C
Market D
Market X
Figure nr 3.2. Internationalisation of the company: an incremental approach
(Source: Hollensen, 1998, p 41)
Increasing market commitment
Increasing geographic diversification
Increasing internationalisation
Market
Mode of operation
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Three Exceptions
The Uppsala model shows that companies take small and incremental steps when
it comes to the market commitment dimension and the geographical and cultural
dimension (Hollensen, 1998). However, there are three exceptions:
1. When firms have large resources the consequences of commitments are
small. Therefore firms with surplus resources can take larger international
steps.
2. When market conditions are stable and homogeneous the firm can gain
relevant market knowledge through other ways than experience.
3. If the firm have considerable experience from markets with similar
conditions it may be possible to generalize this experience to the specific
market (Johanson & Vahlne 1990)
The core concepts of the Uppsala model
-State Aspects and Change Aspects
The model is based on four core concepts: market commitment, market
knowledge, current activities and commitment decisions. Market commitment and
market knowledge constitute state aspects and current activities, and commitment
decisions constitute change aspects. The state aspects are the resource
commitment to foreign markets and the knowledge about the market and
operations. The change aspects are decisions to commit resources and the
performance of current business activities (Johanson & Vahlne, 1977). Market
knowledge and market commitment are assumed to affect both commitment
decisions and the way current activities are performed. These in turn change
knowledge and commitment (Johanson & Vahlne, 1977, cited in Aharoni, 1966).
In this way you can see that the four core concepts of the Uppsala model are
linked together, affecting each other. This is illustrated on the next page in figure
3.3:
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State Aspects Change Aspects
Figure 3.3: Mechanisms of internationalisation – State and Change Aspects
(Source: Johanson & Vahlne, 1990, in Johanson et al, 1994)
The Uppsala model assumes that the firm strives to increase its long-term profit,
which is assumed to be equivalent to growth (Johanson & Vahlne, 1977, cited in
Williamson, 1966). Another assumption is that the firm is striving to keep risk-
taking at a low level. These assumptions characterize the decision making of the
firm and become a frame for in which all decisions are taken. The model assumes
that the state of internationalisation affects perceived opportunities and threats
which in turn influence commitment decisions and current activities (Johanson &
Vahlne, 1977). The following section will review the four core concepts:
State Aspects
As mentioned earlier, the two state aspects are composed by market commitment
and market knowledge. Market commitment is considered because of the
assumption that the commitment to a market affects the firm´s perceived
opportunities and risk (Johanson & Vahlne, 1977).
Market commitment
The market commitment concept is assumed to be composed of two factors: the
amount of resources committed and the degree of commitment, i.e. the difficulty
of finding another way to use and transfer the resources. The amount of resources
is described as the size of the investment. Resources invested in a particular
market can often be considered as committed to that market. The problem arises
when the resources can be sold quickly and the financial resources can be used
Market Knowledge
Market Commitment
Commitment decisions
Current activities
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elsewhere, this is where the degree of commitment comes in. The higher degree of
commitment, the more resources in question are integrated with other parts of the
firm and their value is derived from these integrated activities (Johanson &
Vahlne, 1997)
Market knowledge
An important part of the model is knowledge since any commitment decision has
its foundation in the knowledge of the market. The commitment decisions are
based on several kinds of knowledge. The model divides knowledge into two
parts, general knowledge and market-specific knowledge. General knowledge
concerns marketing methods and common characteristics of certain types of
customers. Market-specific knowledge is knowledge about the characteristics of
the specific national knowledge. Firms look at the opportunities and problems of
the market and based on their knowledge they make decisions about what strategy
to pursue. The evaluation of the strategies and alternatives is based on knowledge
of the market environment and about the performance of various activities
(Johanson & Vahlne, 1977).
There are two ways of obtaining needed knowledge. First, the firm obtain
knowledge through experiential knowledge that only can be learned through
personal experience (Penrose, 1959). Market-specific knowledge is gained mainly
through experiential knowledge. Second, the knowledge called objective
knowledge can be acquired through studying others and learn from their
experience. In the Uppsala model experiential knowledge is emphasized since it is
not as easy to obtain as objective knowledge. Experiential knowledge must be
gained successively during the operations in the country. Experiential knowledge
is particularly important when it comes to connecting with activities that are based
on relations to other individuals. Marketing and managerial work are examples of
such relations. So when it comes to marketing of complex and software intensive
products, experiential knowledge is very important (Johanson & Vahlne, 1977).
At this point it is important to remember that there is a direct relation between
market knowledge and market commitment. The model assumes that knowledge
is considered to be a resource, the better the knowledge the more valuable the
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resource is. If the knowledge is good the commitment increase, especially using
experiential knowledge (Johanson & Vahlne, 1977).
Change Aspects
The second part of the Uppsala model is the change aspects. As previously
mentioned, the change aspects are decisions to commit resources to foreign
operations and the performance of current business activities (Johanson & Vahlne,
1977).
Current Business Activities
Current activities can be divided into three parts. The first part is that the firm
acquire most of its experience through current activities, and then use the
experience to see openings in foreign markets where they make market
commitments. If the needed experience does not exist within a firm they might
hire someone to gain the experience. The model separates these kinds of
experience into two groups, firm experience and market experience. To get good
performance from market activities, both types of experience are needed. The
second part of current activities in the model identifies a lag between current
activities and their consequences. This lag means that although current activities
are implemented it may take time for the consequences to be realized. You have to
consider how long that lag will be since time is an important factor deciding how
large the market commitment will be. The longer the lag, the higher the
commitment of the firm will be (Johanson & Vahlne, 1977).
Finally, when the firms are highly production-oriented there is a low need for
interaction between activities and the market environment. This will make it
easier to start new operations which are not incremental additions to former
operations. Although it should be remember that even production activities are
dependent on the general business climate, which cannot easily be estimated in
other ways than performance of business activities (Johanson & Vahlne, 1977).
Commitment decisions
The second part of change aspects is decisions on commitment. The decision deals
with how much, if any, resources to commit to the foreign market. The model
23
assumes that the decisions depend on which alternatives that exist and how they
are chosen. Decisions are made as a response to opportunities and problems on the
market. It is through market and firm experience that a firm can deal with
problems or opportunities, and it is through the activities of the firm that you gain
experience. To sum up, the state aspects and change aspects of the model are
connected through knowledge, activities experience and commitment.
Existing market risk and uncertainty also play important roles when it comes to
decision on commitment to a specific market. The less a firm understand a market
the greater the risk will be to enter that market. A firm will make commitments to
a market as long as they fell that the risk is tolerable. The commitments are made
in small steps due to market uncertainty (Johanson & Vahlne, 1977).
Limitations of the Uppsala model
The Uppsala model is one of the most famous models for explaining the
internationalisation processes of firms. The model has its strengths in the
simplicity and researchers have been careful with adding more variables, but in
this simplicity lay also the models weaknesses. Forsgren 2002) state “It has been
argued that the model builders apply a more narrow interpretation of learning than
that allowed by literature, which limits the ability of the model to explain certain
forms of internationalisation behaviour” (Forsgren, 2002, p 257).
After many empirical tests related to the Uppsala model, the studies have shown
that the internationalisation process is not valid for service industries. Other
studies have shown that firms lately seemed inclined to leap-frog stages on the
establishment chain, entering markets with higher psychic distance early in the
internationalisation process (Hollensen, 1998). Nordstrom (1991) showed that
Swedish companies on average preferred to enter countries like the United States,
the United Kingdom and West Germany before entering the neighbouring Nordic
countries. According to Nordstrom a reason for this leap-frog behaviour could be
that the internationalisation process as a whole seems to have sped up (Nordstrom,
1991). Porter (1980) states that the world has moved towards homogenisation, and
the reason is technology. This homogenisation helps companies reduce
24
uncertainty when entering new markets since it lowers the psychic distance,
making it easier to “skip” steps on the establishment chain (Porter, 1980).
Another reason that the internationalisation process has been speeded up is that it
has become easier for firms to obtain knowledge and experience. Through
universities and management training centres, firms are able to obtain better
knowledge in a faster and more efficient way (Nordström, 1991). Firms can in this
way hire people with knowledge in international business instead of developing
the knowledge within the firm. In addition, the model is often criticised for being
too deterministic (Reid, 1983, Turnbull, 1987, in Hollensen, 1998). This means
that the model does not leave room for any variation in its explanation of
incremental movement between stages. An example can be a firm with great deal
of experience that keep on exporting instead of taking the next step on the
establishment chain. Also the lack of possible variation makes the model
inadequate when explaining firms that leap-frog stages. Another important
criticism of the Uppsala model is that it ignores market potential and competitive
conditions in the explanation of the model. The internationalisation process is
reduced to the firm’s internal resources, market knowledge and experience from
foreign activities.
3.4 Transaction Cost Analysis (TCA)
“Transaction cost analysis is an interdisciplinary approach to the study of
organisations that joins economics, organisation theory, and aspects of contract
law” (Williamson, 1981, p 573). Oliver Williamson is the spokesperson of
transaction cost economics in the modern age, but the idea that the transaction
should be the basic unit of analysis was first proposed in 1934 by John R.
Commons (Williamson, 1991). Ronald Coase (1937) breached new ground in the
paper called The Nature of the Firm. He challenged the existence of price
mechanisms as coordination and the purpose of the firm, and he reached the
conclusion that the cost of an additional transaction for the firm must be equally
performed within the firm as on the market (Coase, 1937). Coase meant that
“firms and markets are alternative forms of organisation for managing the very
same transaction” (Williamson, 1996 p 151). Other significant contributions on
transaction cost economics have been made by for instance Chester Barnard
25
(1938), Friedrich Hayek (1945), and James Thompson (1967). In the words of
Williamson: “a deepening awareness of transaction cost issues marks the
progression of each of the literature” (Williamson, 1981 p 552).
A transaction is defined as “when a good or service is transferred across a
technologically separable interface”, and it has three characteristics: frequency,
uncertainty and asset specificity (Williamson, 1981). Arrow (1969) defined it as
the “costs of running an economic system” (cited in Williamson, 1991). Some
examples of a transaction are the commission you pay when selling or buying a
stock, or the costs above and beyond merchandise you buy, some would call it the
cost that arise due to institutions. The definition of a transaction is the largest
disadvantage of the transaction cost analysis; it is hard to put your finger on what
it is. The criticism on the theory will be reviewed later in this section.
Transaction cost analysis has been found useful in explaining which mode of
entry to use when entering a new country. TCA makes the assumptions that
markets are competitive, and that a low-control entry mode is the default choice
(Whitelock, 2002). Williamson (1991) emphasise the importance of asset
specificity, with the implication at which cost, high or low, an asset could be
transferred or used in another way than intended. Williamson divides asset
specificity in:
1. site specificity
2. physical asset specificity
3. human asset specificity
4. brand name specificity
5. dedicated assets
6. temporal specificity (Williamson 1991)
When reviewing TCA the assumptions on bounded rationality and opportunistic
behaviour cannot be overlooked. Bounded rationality is when a situation gets too
complicated our senses have problems to interpret the situation, and rationality is
best bounded by the company. Opportunistic behaviour is the fact that a person
will work with his or her best interest in mind, the solution is as with bounded
rationality control (Williamson, 1985).
26
Zhao and Decker (2004) argued that the analysis of transaction cost (TCA) was
first proposed by Anderson and Gatignon (1986) to explain economic problems
when asset specificity is high. Anderson and Gatignon found that companies
choose foreign market entry mode that maximizes the efficiency of long-term risk
adjustment. The company must be able change its entry mode efficiently and to a
minimal transaction cost (Zhao and Decker, 2004). The efficiency of the entry
mode that the company chose depends on the optimal degree of control, and four
different aspects of control:
1. transaction-specific asset: specialized investments to one or some users
2. external uncertainty: the entrants external environment
3. internal uncertainty: the entrants incapacity to measure performance
4. free riding potential: receiving benefits without associated work
An example of a high-control mode of entry is wholly owned venture. Franchising
is a medium-control mode, and some licensing agreements are examples of a low-
control mode of entry (Anderson and Gatignon, 1986). Information from and
research on the four aspects of control could be used when trying to create a
model for industries´ different choice of market entry mode:
1. Transaction-specific assets: proprietary knowledge generates from
research and development in a company. Research has shown that
proprietary knowledge faces the classical problem of information; the
buyer cannot know what the knowledge is worth, and the solution is a high
level of control. Stopford and Wells (1972) implied “that firms tend to
reserve proprietary knowledge for entry vehicles they control completely”
(cited in Anderson and Gatignon, 1986 p 11). Lilien (1979) suggested that
when an industry is competitive and a special mode of entry is most
efficient all firms in that industry used the same efficient entry mode.
Coughlan and Flaherty (1983) found that high control is more used for
firms in technically-intense industries. Another aspect on transaction-
specific assets is that it is difficult to use low-control entry modes for
activities and knowledge that have bad structure and is hard to understand.
Teece (1976) found that the cost of a firm’s first activity abroad is much
27
higher than the consequential activities, this because the activity is hard to
understand. Wilson (1980) found that a company that has simple products
use a low-control mode of entry, while complex products demand a high-
control entry mode (cited in Anderson and Gatignon, 1986).
Customized products to a customer demands an entry mode with high-
level of control. Products that are customized needs significant local
knowledge, and relationships between the buyer and supplier must be
established. Johanson and Vahlne (1977) propose that a people-intense
activity such as management consulting and banking demands a high-
control mode of entry.
According to the Uppsala internationalisation theory a firm should demand
a less-control mode of entry when the product class is more mature.
Williamson (1979) argues that older technology demands lower control.
Bivens and Lovell (1966) propose that the expected gain from a mature
product is lower than from a new product, and that firms with new product
have more bargaining power (cited in Anderson and Gatignon, 1986).
2. External uncertainty: the unpredictability of the firm´s environment could
be minimized by avoiding ownership, but the efficiency of entry modes
are hard to predict. Naturally, in uncertain situations control is more
desired. Some examples of external uncertainty are the political and
economic condition in the given country. The TCA model proposes that in
an unstable market a low-control entry mode facilitates the commitment,
and the feasibility to change partner or renegotiate a contract. However, an
amplified combination of country risk and transaction-specific assets
demands a high-control entry mode.
3. Internal uncertainty: when good measurements of output are not available
or the affiliation between input and output are unclear a firm has problems
to assess its employee’s performance. Internal uncertainty makes control
more sought-after and the firm has to find new ways to measure
performance, for instance monitor inputs or create incentives. A difference
28
exists between domestic and international environment, entrants in an
international market has harder to surmount internal uncertainty. However,
the entrant in a non-competitive industry may not reflect the degree of
control with international experience (Anderson and Gatignon, 1986).
A variety of internal uncertainty is a sociocultural distance, the difference
between home and host country, and it is a subject where researchers take
different sides. One way to look at sociocultural distance is that the greater
the difference is the lower degree of control a company should require. An
alternative is that the firm should demand ownership and do things their
own way when the sociocultural difference is high. Transaction cost
analysis proposes that sociocultural distance makes internal uncertainty
high and that transaction-specific assets emerge since employees needs to
be trained when the company enter a foreign market. Anderson and
Gatignon suggest that both low-control and high-control modes are more
efficient than intermediate levels; low-control avoids lock in-situations but
some specialization is lost, and high-control creates specificity but must be
managed (Anderson and Gatignon, 1986).
When a specific country is the object for foreign companies the country
nationals gain skills and education. Over time the nationals will posses
management skills over a wide basis, and a new entering company could
use existing workers in business situations and benefit from their previous
acknowledged skills. The impact is that the entrant does not need a high-
control mode when entering the country; they could use a low-control
entry mode such as licensing (Anderson and Gatignon, 1986).
4. Free-riding potential: there is always a risk of free-riding, receive benefits
without the costs, in all business units in a firm. The solution to free-riding
is high control, subsequently an entry mode offering higher control.
Research has found that different things affect the potential for free-riding,
for instance a more standardized product is more vulnerable, and brand
value increases the demand for control (Anderson and Gatignon, 1986).
29
Limitations of the transaction cost analysis
Even though transaction cost analysis is one of the most common used theory on
the research of foreign market entry modes it is not perfect, some criticism are:
• Transaction costs are both difficult to define and measure.
• The purpose of transaction cost analysis is to be a foundation of the
decision-making on which entry mode to choose, but transaction costs
could only be measured after the use of a certain entry mode.
• Since different researchers have made different versions and extension of
TCA the theory could be seen as out of date.
• Ghoshal and Moran (1996) found the theory to have too narrow
assumptions of human nature. They also question why the theory has been
immune to aspects of social control.
• Hollensen (1998) argues that the theory neglects internal transaction cost;
that no friction occurs within the firm (Hollensen, 1998).
3.5 Eclectic paradigm (OLI model)
The eclectic paradigm, also known as the OLI theory, was originally created by
John H Dunning. The theory was presented for the first time at a Nobel
symposium in Stockholm in 1977. Dunning developed the model and published
his first presentation of it in1980. He continued to further develop the theory in
publications in 1988, 1995, 1998 and 2000.
Dunning has used key points from other researchers and combined them in order
to create the OLI model. Raymond Vernon’s product life cycle theory (1966)
explains why companies may choose to enter new markets. He argues that when a
product mature in its domestic market in some years, the demand for the product
in other markets raise. This makes it worth wile for a company to serve new
markets. It also makes it interesting to produce in other countries as they can have
location-specific advantages such as low labour cost and favourable tax-
regulations. Dunning also accept the internalisation theory which argues that it is
difficult for companies to use a contractual entry mode, such as licensing or
30
franchising, to profit from their firm-specific assets (know-how) due to market
imperfections.
The OLI theory determines three advantages that Dunning argues are vital for a
company’s entry mode decision. Ownership advantages or firm-specific assets
are advantages or assets that are exclusive for the firm and assets that no
competitors possess. The second advantage is location advantage. It is when there
are favourable factor endowments in foreign markets that make it profitable to
pursue foreign production. The third advantage is internalisation advantage which
means advantage that makes it more profitable for a firm to transfer its firm-
specific assets to other locations within the own organisation instead of licensing
it (Dunning, 1980). The more of these advantages a firm possess, the more likely
it is that a firm pursue an entry mode strategy that ensure a high level of control
such as a wholly owned subsidiary (Decker, 2004).
• Ownership advantage
Ownership advantages are advantages that are specific to the firm. It can
be special know-how, brand name, size and management skills and
experience. “A firm's asset power is reflected by its size and multinational
experience, and skills by its ability to develop differentiated products”
(Argawal & Ramaswami 1992). There are two types of ownership
advantages, basic or general ownership-specific and additional ownership-
specific. General ownership-specific are advantages that a firm can create
for itself or acquire from other firms or institutions. This can be
technology, organisational skills and brand name. These advantages are
not exclusive either to international or multinational firms (Dunning,
1980). However, a firm must also possess additional ownership-specifics
to outweigh the cost of operating in a new environment (Hirsch, 1976).
These advantages can only be reached if a firm is operating in another
international market than its own domestic market. This can mean
diversifying the firm’s investment portfolio in order to reduce investment
risk. It will also enable the firm to transfer funds between countries with
different currency in order to take advantage of fluctuations in exchange
rates (Rugman, 1979). A company should also pursue parallel production
31
to minimize the effect of instabilities in one market such as strikes or other
political situations (Dunning, 1977).
• Location advantage
Location advantages can be factor endowments such as land, labour and
capital that are only present in some geographical areas. The advantages
do not only have to be traditional such as natural resources, low cost
labour and market proximity but it can just as much be tax regulations and
other favourable legal or political policies (Dunning, 1980). Location-
specific advantages are different in some locations but are available to all
actors (firms) that are present in that market (Dunning, 1988). Location
specific advantages can be used in both the local market as the company
can adapt to the culture and environment and be able to serve the local
customers. It can also be to use the low-cost advantage in order to produce
product for other markets to a lower cost.
• Internalisation advantage
Internalisation is when a firm transfer its ownership advantages across
borders within the company’s own organisation instead of externalizing it
by licensing or selling it to other companies (Dunning, 1980). When a
company internalize its knowledge it tries to avoid cost and risks that can
occur when they externalize it. It reduces the risk that contractual entry
modes, such as licensing and franchising, bring which also leads to a
reduction of control costs. When companies internalize their ownership
advantages, transaction costs will arise. The company will have to evaluate
the transaction cost in order to see if it is profitable to internalize. If
internalizing should be profitable it needs to be lower than the cost of
externalizing such as cost of control and negotiation costs.
Dunning discuss why companies do not choose to externalize their know-
how and management skills by licensing or selling it. One of the main
reasons for a firm to internalize its ownership advantages is that it can
avoid market imperfections or take advantage of them .“Market
imperfections arise wherever negotiation or transaction costs are high”
32
(Dunning, 1980). Market imperfection can be uncertainty over price,
availability of supplies and the lack of control. Companies also prefer to
internalize when a host country have favourable legal or political policies.
Inter-relationship between factors
It is important to understand that even if Dunning explains each advantage
separately, they all are inter-depended of one another. When deciding on an entry
mode, companies must analyze all of their advantages. Argawal & Ramaswami
discuss the inter-relationship between the advantages. They state that firms would
prefer an investment mode, such as wholly owned subsidiaries, if it is a large
company with high multinational experience (ownership advantage) in countries
that have higher market potential (location advantage). They also notice the inter-
relation between internalisation advantage and ownership advantage. Firms that
have valuable ownership advantages tend to choose an entry mode with high
control when entering markets with high contractual risk (Argawal & Ramaswami
1992). The above examples show how the different advantages relate to each
other. In figure 3.2 you can see how the advantages inter-relate.
Source: Argawal & Ramaswami (1992, page 5)
Figure 3.4: A Schematic Representation of Entry Choice Factors
Limitations of the eclectic paradigm
Some limitations of the eclectic paradigm is that even though it consider different
variables and how they are inter-depended of each other, this is also one of the
limitations of the theory. It is difficult to analyze how the advantages inter-relate.
Ownership advantages Firm size Multinational Experience Ability to develop Differentiated product
Location advantages Market potential Investment risk
Internalisation advantagesContractual Risk
Choice of entry mode No involvement Exporting Joint Venture Sole Venture
33
However, the most common critique to the eclectic paradigm is that it is a static
theory. It explains how firms use their existing assets in order to enter new
international markets and choosing an optimal entry mode but it does not explain
how firms may use its advantages in order to create future assets (Dunning 2001).
Another critique is that the model tries to consider all important factors that has an
impact on the choice of entry mode but fails to strategic factors among others
(Argawal & Ramaswami 1992).
3.6 Modes of Entry
There are several ways to enter a new market, from low commitment to high
commitment. The difference is in the control and risk aspect. Most researchers
divide the entry modes in categories. In this dissertation the following
classification has been used: Exporting entry mode, Contractual entry mode and
Investment entry mode. These entitlements will be used repeatedly throughout the
rest of the dissertation. Industries’ choice of different entry modes will be
analysed by using these entitlements (see table 4.1). The following part will
explain each part separately.
3.6.1 Exporting entry modes
One way of entering a new market is to export. Many firms, especially
manufacturing firms often begin with exporting when trying to expand to other
markets. (Hill, 2007) There are several advantages and disadvantages with
exporting as entry mode.
Advantages
There are two main advantages with export:
• Export is a cheap way of entering new markets. Firms that pursue an
export entry mode escape the financial risk with establishing
manufacturing operations in markets that they have low knowledge and
experience of (Hill, 2007).
• Companies in some industries try to achieve experience curve and location
economies in order to lower their production costs. This means that in
34
order to decrease costs companies can produce large volumes of products
in order to spread the fixed costs on a large volume. The employees also
create new and more efficient ways to produce which leads to a higher
productivity. If companies serve their global market from a few locations
and export their products, they can achieve experience curve economies.
Firms that export can choose to produce the optimal location for their
specific production and serve the global market from that location. Then
they will achieve location economies (Hill, 2007).
Disadvantages
There are of course some disadvantages of exporting. If a company wants to
realize location advantage it has to produce at the optimal location. Firms that
export often choose to produce in its home country. But sometimes the optimal
location is abroad and then they fail to achieve location economies.
Some products are unprofitable to export due to their value-to-weight ratio. If a
product has a low value-to-weight ratio it means that the products value is low in
relation to its weight which results in high transportation cost in relation to the
products overall value. Also the host country can have tariffs that prohibit trade or
at least makes it unprofitable to export to that country (Hill, 2007).
3.7.2 Contractual entry modes
Contractual entry mode is an entry mode where one company reach some form of
agreement with another part that enables them to use the firm’s specific
advantage. There are three types of contractual entry modes. Licensing,
franchising and joint venture all contain some form of a contractual agreement
between the partners.
Licensing
Licensing is when one firm (the licensor) grants another firm or individual (the
licensee) the right to use its firm specific assets such as trademark, technology or
design under a certain time period. In return the licensee will pay a royalty fee on
their profits to the licensor. The main advantage of a licensing agreement is that
the licensor do not need to carry any investment costs in order to get their product
35
into new markets. The licensee usually puts up the capital needed to introduce the
product at the host market. It is a cost efficient and low risk entry mode for the
licensor (Hill, 2007).
Disadvantages
When a company license its firm specific assets, it will lose control over
marketing and manufacturing. It will then fail to achieve experience curve
economies and location advantages. Another disadvantage of licensing is that it is
connected with high risk to license firm specific assets such as technological
know-how. There is always a risk that the licensee uses the know-how in order to
develop new, similar products that can compete with the licensors products. This
risk can be reduced if the companies can reach god agreements (Hill, 2007).
Franchising
Franchising is a similar entry mode compared to licensing. It also involves one
company (the franchiser) who lets another company or individual (the franchisee)
the right to use its firm specific assets. The difference between licensing and
franchising is that in a franchising arrangement, the franchiser helps the franchisee
with operational tasks and supports the franchisee’s business. The franchisee also
has to follow strict rules as to how they do business. Franchising is used mostly by
service companies. The advantages of franchising are similar to the ones in
licensing. The franchiser does not need to invest and carry any financial risk as the
franchisee puts up with the needed financial investment (Hill, 2007).
Disadvantages
The main disadvantage with franchising is that the franchiser has difficulties to
secure a high quality level on their products/service. The franchiser wants the
franchisee to nurture their brand name at it can arise cost of control to the
franchiser (Hill, 2007).
Joint venture
A joint venture is when two or more firms establish a new firm that is jointly
owned, but sometimes one company has a majority share. The main reason to use
a joint venture as entry mode is that the companies share the risk and costs
36
amongst them. But there is also the benefit of entering a market with a company
from the host country as they have experience of doing business in that specific
country. The local alliance partner has a firsthand knowledge of the political and
cultural system in the host country. In some countries, this is the only entry mode
possible for companies due to political and legal policies that prohibit foreign
ownership (Hill, 2007).
Disadvantages
There are several disadvantages with a joint venture. As in every partnership there
is a possibility that friction will occur. It can easily be conflicts in a joint venture
in questions of investments and corporate goals. There is also the possibility of a
power struggle in order to gain control. Joint venture also has some disadvantages
similar to licensing as it can reduce the ability to achieve experience curve
economies and location advantages. The risk of losing control of the company’s
specific assets such as technological know-how may also occur (Hill, 2007).
3.7.3 Investment entry modes
When entering a new market a company has the option to establish a wholly
owned subsidiary. This means that the company owns 100 percent of the stock in
the foreign firm. In turn, a wholly owned subsidiary could be done in two separate
ways: Greenfield investment and acquisitions (Hill, 2007).
Researchers have acknowledged both advantages and disadvantages of this
investment mode. A wholly owned subsidiary reduces the risk of losing control
over special competencies. Furthermore, it increases control over the operations in
the country. A wholly owned subsidiary may facilitate the situation when a
company strives for a global strategy. For example when producing units is
located all over the world to gain cost advantages. Finally, a wholly owned
subsidiary gives the firm 100 percent of the profits. The largest disadvantage of
this entry mode is the cost of capital; it is the most costly mode of entry option.
Another big disadvantage is the cultural clashes that may occur. It is impossible to
predict how the relationship between the two firms will work out (Hill, 2007).
37
Greenfield investment
When building a new business unit from the ground, the biggest advantage is that
the company can establish it according to their own preferences. When choosing
this alternative you avoid cultural and organisational issues, and functional
routines. However, Greenfield ventures are slower to establish. The risk is also
higher, but less risk for unexpected events. Another disadvantage of Greenfield
investment is the limited market potential if a global competitor enters the same
market trough an acquisition (Hill, 2007).
Acquisition
An acquisition could be the best way to match a competitor or build a presence in
a market, since they are fast to implement. An additional reason could be to
obstruct competitors, i.e. to buy a company before any of your competitors buy it.
An acquisition could be seen as less hazardous since you are buying a known
profit and revenue. Moreover, you could get tacit knowledge about the market that
you otherwise would not encounter. Despite all facts about the advantages of an
acquisition research has shown that in most cases it fails to create value. The
reasons could be that the company pay too much for the assets of the acquired
firm. Furthermore, we have mentioned the cultural clashes earlier, but also the
attempt to create synergies between the two firms could have the opposite effect
(Hill, 2007).
3.8 Summary The table on the next side summarises the three theories:
38
Table 3.1: Summary of the three theories
The Eclectic
paradigm (OLI model)
The Uppsala model
Transaction cost analysis (TCA)
model
Unit of analysis The firm The firm The transaction or set of transactions
Basic assumptions about firms behaviour
The eclectic paradigm states that a firm’s entry mode
decision is determined by the
composition of three advantages. The more of these advantages a firm possess, the more
reason a firm has to pursue a high
control entry mode.
Based on a step by step decision-
making process with influence from
competitive market factors and on
behavioural theories. A gradual learning-by-doing process.
There are always transactional
difficulties, friction, between buyer and
seller in the real world. The friction is
mainly caused by opportunistic
behaviour. Managers do not always act
fairly, put self interest first.
Explanatory variables
affecting the process
development
A firm’s ownership-
location- and internalisation
advantages.
Psychic distance between the home
market and the international market.
The firm’s market knowledge and
commitment to that market.
When a transaction is characterized by; asset specificity,
uncertainty (internal and external) or
frequency of transaction, the
transaction cost and transactional
difficulties will increase.
39
Chapter 4: Creating an alternative model ________________________________________________________ In this chapter we will present an alternative model based on previous mentioned
theories. The model will show which entry mode is believed to be most used by
companies in different industries. The model is based on theories, industries’
predicted choice of entry mode and it is motivated with propositions that will be
presented in this chapter.
4.1 Introduction
As mentioned earlier, there is a need for a model that shows how companies in
different industries enter new markets. Even if some companies in the same
industry use different entry modes, we believe that a majority of companies in the
same industry use the same entry mode. In the theories we have presented in
chapter three, several factors affecting the foreign market entry mode decision
was enlightened. We have chosen some of these when we tried to create a new
model. As we will discuss later in this chapter, we have focused on several aspects
from the eclectic paradigm by Dunning. The new model is supposed to show how
all industries choose to enter new markets. Therefore it is necessary to choose
factors that on some level have an impact on all companies’ choice of entry mode.
It is also important to analyse the industries that we investigate and discuss what
characteristics each industry have and how each factor in the model affect the
companies in the industry. We have a thorough discussion on this later in this
chapter. We begin by discussing on which scientific basis our model is created.
4.2 Scientific influences – Deciding factors in the model
We discussed earlier in chapter three that there are three main schools of thought
concerning how companies shall approach the decision of foreign market entry
mode: Uppsala, TCA and the Eclectic paradigm. When we were creating our own
model, we thought that it was necessary to decide which scientific approach we
believed to be most accurate in today’s business climate. All theories have good
arguments and ideas that describe the complex decision managers have to face
when entering new markets. But one factor in particular separates the different
schools, namely location. The third school thoughts about location factors and
40
their importance in the future are interesting and it seems to fit well with today’s
global economy. The first school, which regards the internationalisation process
as a risky operation due to political and cultural differences, is still valid but,
today the market is more global then it was when the Uppsala model was created.
The access to information is almost unlimited today which affect managers’ way
of doing business. There are always some aspects in a new market or country that
are unknown but managers have so much information to access that markets are
rarely completely unknown. The political situation is also more predictable
nowadays when more and more countries have democratic societies. That is why
we believe that even if a foreign market entry always is connected with some risk,
the amount of risk has decreased for some markets. As the eclectic paradigm
considers the transaction cost theory, it absorbs some of the important elements
that are the second school’s key features. As we believe location factors to be very
important in the global marketplace and will continue to be so, we are followers of
the third school’s thoughts of international business. We have based our model on
the eclectic paradigm and many of the thoughts and factors we consider in our
model are directly from it.
We consider three main factors that we will present in detail later in this chapter.
The three factors are firm specific assets, location aspects and companies’ choice
on how to use their firm specific asset, internally or external. We also mention
that when companies are choosing a contractual or investment entry mode, the
level of commitment to the new market gradually increase. This discussion is
borrowed from the Uppsala theory which we find to be accurate in this aspect of
entry mode choice. As we have argued much for the importance of considering
location factors, it is one of the factors we emphasise on in our model but we have
a different approach to it than the one Dunning has in his eclectic paradigm.
4.3 A new approach - The Industry Internationalisation model
The industry internationalisation model has three parts:
• Firm specific assets (FSA)
• How companies use their firm specific assets
• Need of local representation
41
We believe that these factors combined can indicate which mode of entry an
industry would prefer. We will describe each of the three factors in detail later.
Even if we focus on these factors and these are the ones in our model, there are
still some factors that are too important to neglect. When we later in this chapter
review every industry, we create propositions based on the discussion about the
industry. These propositions will be based partly on the three factors mentioned
above but also on some other factors. Risk and control are two factors that are
constantly mentioned in researchers work. When a company has a high degree of
FSA, it has an incentive to control it carefully in order to protect the FSA from
competitors. When companies choose to have high control the risk will increase as
it often involves large financial resources in order to have high control. This
discussion is common in this field in business. Transaction cost analysis discusses
the control problem comprehensively. Anderson and Gatignon (1986) exemplify
which degree of control a company get when it is choosing different entry modes.
We also presented this in chapter three when discussing entry modes in detail. In
the TCA theory it is stated that the control aspect is so important, that we have to
consider it even if it’s not a determining factor in our model.
We introduced the value to weight ratio on page 33 when we presented the
different entry modes. This factor is also used to analyse the different industries. It
is difficult to analyse exporting entry modes without using this factor as it is one
of the most determining factor when you consider export as entry mode. We have
also used an argument from the Uppsala model. In our model we show what level
of commitment a certain entry mode has. In the analysis of the industries we will
repeatedly use this entitlement as we believe that it clearly shows that some entry
modes require substantial resource commitment. By this we have tried to capture
some important factors that are mentioned in all of the theories in the theoretical
framework.
The decision of which entry mode to choose is best seen in a table comparable to
Macharzina´s (2003) interpretation of the eclectic paradigm. Macharzina focused
on the three parts of the eclectic paradigm (ownership, internalisation and location
advantages) and how it affected the market entry mode decision. The industry
internationalisation is, as mentioned earlier, influenced by Dunning´s eclectic
42
paradigm theory but has another angle and approach. The following table shows
how Macharzina interpreted Dunning´s theory, but table 4.1 is configured to fit
the industry internationalisation model:
Table 4.1: Basics of the Industry Internationalisation model
Returning to Dunning´s ideas, the same approach is used for the industry
internationalisation model, when all three parts are met and needed a higher
commitment entry mode should be chosen. The same approach is then used in
order to make propositions about each industry, meaning that each industry will
be analysed on these three aspects of the industry internationalisation model. The
entry modes have been divided as previously explained into export, contractual
and investment entry mode. The following part will explain each of the three parts
separately and how they affect the entry mode decision:
• Firm specific assets (FSA): all companies have a specific asset. It could
be know-how, experience, brand name, unique products and so forth,
which is something the company want to control. However, in relation
between industries a company´s specific asset may not be that important.
For instance the healthcare and IT industry could be seen to have a higher
specific advantage and knowledge since it demands much know-how,
experience and research and development to succeed in the industry. When
comparing these two industries with the transport industry, in which all
that is needed to start up a business is assumedly a lorry. A company in the
healthcare and IT sector are much more technologically advanced,
demands more resources and is more difficult to set up. The FSA
Influences /
Mode of Entry
Firm specific
assets
Internal / External
use of FSA Need of local representation
Investment mode Existing Internal Existing
Export mode Existing Internal Not existing
Contractual mode Existing External Not existing
43
influences all three entry mode categories in the market entry mode
decision, but not as much as the two following parts.
• Internal/External use of FSA: when a company has firm specific assets
and advantages it has two options how to handle it. The company could
both use the FSA internally and keep the knowledge within the company,
or externally and let the knowledge be used by others. In turn, when
choosing to use the knowledge internally a company has two options. The
company could choose an export entry mode and export the knowledge.
This means that the company supplies the whole market form often one
centralized location. The option minimizes the risk but also the
commitment. Even though some acknowledged researchers mean that
when exporting you let an external partner transport the products, we
believe that the companies FSA still stay within the company. The other
option is to use an investment entry mode, and choose between Greenfield
investment and acquisition. Greenfield investment is when the company
starts up a new subsidiary from the ground, and acquisition is when the
company acquire an already established company or facility. The
investment entry mode requires much more financial resources, it involves
the highest risk but it gives the company total control and could assumedly
lead to higher profits.
When choosing to use the knowledge externally the company use a
contractual entry mode. The option is to either license or franchise. When
licensing a company has no control of what the licensee does, but it allows
the company to enter a new market without risk and still increase profits.
Franchising works in a similar way as licensing but involves higher
control for the franchiser. The franchisee must follow rules and protocol
how to do business, and the franchiser enter a new market with a bit higher
risk than licensing but with much more control. A joint venture is another
entry mode that is common. When entering a joint venture, a company in
some degree both use the FSA externally and internally. The company use
44
their FSA by them self but they also choose to share the knowledge with a
small number of partners.
• Need of local representation: in difference to Dunning and the eclectic
paradigm the industry internationalisation model looks at localisation in
another way. When Dunning refers to location advantages he signifies
factors that make it more profitable to produce at a specific location as
resources available in the market such as land and capital. The industry
internationalisation model refers to the significance for a company to be
locally and physically represented in the new market. When looking at the
entry modes a distinct difference could be noticed. When choosing an
investment entry mode the company receives a high commitment and high
control of the company´s assets. This in turn increases the risk, but for
some industries there is no other solution. For instance the materials sector
have a strong need to control the natural resources, such as timber or
mining sites, and have to invest to be active on that location.
If a local representation is not as needed as in the materials sector, the entry mode
decision depends on the extent of local representation and the choice how to use
the FSA. When looking for a medium high representation on the new market and
the firm has the ability or need to use their FSA externally, a contractual entry
mode is the best solution. However, when the need to use their FSA internally is
higher, the company will choose an exporting entry mode and the market
commitment and representation will decrease.
The higher the need for a company to be represented in a new market is, the
higher the commitment will be, favouring an investment entry mode. The
commitment is accompanied with higher risk but also higher control. When the
need to be represented on a new market is low a contractual or exporting entry
mode would be preferred.
4.4 Summary
The previous discussion about the origin of the Industry Internationalisation
model leads to the creation of a model. In this model we show how the entry
45
mode can be analysed by using the factors in the above discussion. The model is
created with the purpose that companies can analyse how the different factor
affect them and then put them self in the model. The model should then show the
appropriate entry mode to choose when entering a new market. That is why we
analyse each industry separately to determine on what level and extent the factors
affect them. We then put them into the model to show which entry mode we
believe to be most preferred and appropriate in the specific industry. The
industries is analysed by using table 4.1 that we showed above. Below the
industry internationalisation model is showed to illustrate the inter-dependence
between the factors.
Degree of firm specific assets (in relation to other industries) Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Figure 4.1: The Industry Internationalisation model
The next part will review each industry separately and the chapter will end with a
final version of the industry internationalisation model with every industry placed
in the figure.
Level of Commitment
46
4.5 Propositions On most stock markets over the world the same standard to divide companies in
different industries (Global Industry Classification Standard, GICS) is applied.
The Swedish stock market is no exception and since it is these companies that are
the target of this research the GICS is applicable. According to the GICS standard,
companies are divided in the following way:
• Energy
• Materials
• Industrials
• Consumer Discretionary
• Consumer Staples
• Health care
• Financials
• Information Technology
• Telecommunication Services
• Utilities
In this research focus is on SMEs, and they are not represented in all industries. In
addition, some industries are so wide with many different companies and different
preferences in entry mode, they had to be divided. The following part will
demonstrate which industries take part in our research and which industries that
have been divided. In accordance with the previous description of the industry
internationalisation model, each industry will be reviewed on:
• Firm specific assets (FSA)
• Internal/External use of FSA
• Need of local responsiveness
Propositions will be created to analyse each of these parts in every industry. This
will clarify their positions along the axes of the industry internationalisation
model. We will propose in which extent local representation and FSA affect the
entry mode decision in the different industries. In the end of this chapter we will
illustrate where the industries will be positioned in the model.
47
4.5.1 Finance The Financial sector consist of companies involved in banking, finance,
investment banking and brokerage, asset management, corporate lending,
insurance, financial investment and real estate. On the Swedish stock market the
finance sector is represented by a wide spread of companies in all sizes. However,
all companies are similar in the way that they are depending on a specific
knowledge possessed in the company.
The financial sector could be categorized to have high FSA. The knowledge could
come in forms of know-how, management, experience and so on. Dunning (1980)
refers to this knowledge as the firm´s ownership advantages. It’s been found that
when asset specificity and ownership advantages are high, companies have a need
of control, to make sure all knowledge stays in-house. To have high control means
not only a higher risk but a higher commitment. To have high commitment and
control on a market an investment mode would be preferred (Dunning, 1980).
In addition, companies in the financial sector would prefer to use the FSA
internally. Rugman (1979) found that an ownership advantage could be to be
represented in many different markets in order to take advantage of fluctuations in
exchange rates. The financial sector deals with large sums of money, over a large
amount of countries, which could result in profits by transferring money between
countries. This leads to a mode of entry with a higher control, such as joint or sole
venture, when entering a new market (Rugman, 1979).
Another aspect of the financial sector is to look at the product it sells. Companies
in the financial sector have no material product. Instead they could be seen to
offer a service; which leads to that the alternative to export when entering a new
market is lost. A company could not export know-how or experience, it is
something you have and need to put across in person, and as a company. This
leads to that an investment mode is preferred.
P 1: Financial companies will tend to use their FSA internal, and choose an
investment entry mode.
48
Another way to look at the financial sector is to look closer on the banking sector.
History has shown that customers choose a bank that is represented on the home
market. From the customers point of view it is about commitment, security and
trust. It could be assumed that no one would choose a bank from another country
with no offices in the country. When it comes to loans and mortgage, it is
impossible to negotiate deals without knowledge about the market, which you get
when you are active in that market. In addition, companies in investments and
brokerage demands valuable knowledge about the market, leading to the need of
being represented on the market to be competitive. Together, it leads to an entry
mode with high commitment and control. Subsequently it leads to an entry mode
with higher risk, an investment entry mode.
Johanson and Vahlne (1977) found that the higher intensity of people involved in
the process and the company, the more ill-structured they become. People-
intensity is described by the authors as “activities that are based on relations to
other individuals”. They came to the conclusion that such customized businesses,
for instance banking, could be expected to be dominated by high-control entry
modes (Johanson and Vahlne, 1977 28). Caves (1981) made a survey that service
firms, for instance companies in the banking sector, was more likely to go abroad
than other firms, and often by an own entrance. He found that the reason was to
preserve and extend their already existing knowledge. Location advantages, as
referred to by Dunning, are an important aspect for the financial sector. Location
advantages could be labour or capital, legal or political policies and so forth.
Capital is especially important in the financial sector since it is the core of the
business (quoted from Anderson, 1986).
P 2: Companies in the finance sector have a high need to be represented on the
local market, leading to an investment entry mode strategy.
4.5.2 Materials
The Materials sector consists of a wide range of commodity-related
manufacturing companies. Included in this sector are companies that manufacture
chemicals, construction materials, glass, paper, forest products, and metals,
minerals and mining companies, and producers of steel. The companies in this
49
industry can be categorized to be very depended on natural resources. In addition,
the majority of the companies could be assumed to be of large size. Since the
Materials sector is a capital-intense industry the firms could also be assumed to
have large financial resources, which increase the options of which entry mode to
choose.
As mentioned earlier, companies in the materials sector needs to be where the
natural resources are and control them when producing its output. As these
resources often are present in some specific geographical areas they need to be
active on that local market. For instance mining and timber could be transported
but still needs to have a production facility nearby the source to create the output.
In the Eclectic theory this is referred to as location advantages. When location
advantages are high a company should prefer to choose an entry mode with higher
commitment and risk, such as joint or sole venture (Dunning, 1980).
P 3: Companies in the Materials sector have a strong need to be locally
represented in order to control the resources.
Companies in the Materials sector have a specific asset in the knowledge of how
to produce and manufacture their final product. This knowledge is not something
that you could license or franchise, since this would increase the risk of losing the
specific assets. In addition, it is a complicated and long process how to produce
the output. Control is necessary to use the knowledge possessed within the firm.
When control is a significant part of a firms business an investment mode would
be preferred when entering a new market (Dunning, 1980).
P 4: To control their know-how and manufacturing skills, material companies
would prefer to use an investment entry mode.
Another way to analyse the products in the Materials sector is to look closer at the
materials. Products such as gold and timber are often very heavy, and they are
complicated to export since their size is unpractical. When the value-to-weight
ratio is low it is not profitable to export, especially not long distances. This leads
to the favouring of an investment entry mode (Hill, 2007).
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4.5.3 Healthcare
The Health Care sector can be divided into two main industry groups. The first
group include companies that manufacture healthcare equipment and supplies,
such as distributors of healthcare products. The companies can also provide
healthcare related services, and are owners and operators of healthcare facilities
and organisations. The second group includes companies primarily involved in the
research, development, production and marketing of pharmaceuticals and
biotechnology products.
A decisive part of the healthcare industry is research and development. R&D can
be very expensive and it might take a long time until you can reap the profits of
your investments. During this time-period the companies are exposed to the risk
that their research might not be successful, therefore they want to minimize the
risk.
Johanson and Vahlne (1977) refer to risk in the Uppsala model as a part of the
knowledge and experience of a market, and degree of commitment to that market.
Since the healthcare industry often has high risk wrapped up in the core activities
of the business through R&D they need to reduce the risk somewhere else. A way
to reduce the overall risk for the company is to choose a low-risk entry mode,
such as licensing or export, when entering a foreign market. By choosing
licensing you let the licensee take the biggest part of the risk (Johanson and
Vahlne, 1977).
Anderson and Gatignon (1986) account for several studies that have been made on
the subject. Many of the studies came to the conclusion that the higher company´s
research and development expenditures are the higher the extent of licensing are
(Anderson and Gatignon, 1986). To compensate the risk with R&D the companies
can choose an entry mode with lower risk. The company could use the FSA both
internally or externally. When trying to minimize the risk, the company should
favour an exporting mode. When a company export it keeps the knowledge in-
house and avoids negotiating and control costs that arise when you license.
51
P 5: To level the risk of research and development, healthcare companies would
prefer a low risk entry mode.
The best way to reduce the risk of entering a new market is to export the products
to that market. By doing this the companies can serve a global market without a
high risk entrance. If you export the need for knowledge and experience of a
market is low, and the commitment to the market is also low. According to the
Uppsala model, this is a way for the company to reduce the risk (Johanson and
Vahlne, 1977). But exporting is not always the best entry mode. It depends on the
products you sell. If you have products with low value-to-weight ratio it may not
be profitable to transport your products to the market, you need to produce your
products close to your customers. In the healthcare industry the products produced
are often of low weight and high value, the combination gives the product a high
value-to-weight ratio. An example of a product with high value-to-weight ratio is
pharmaceuticals and biotechnology products. Since the healthcare industry needs
to reduce their risk, exporting high value-to-weight products seems like an
attractive way to enter a market (Hill, 2007).
The situation changes when the company has a patent on their product. For
instance in markets that are more unstable the company could choose to export.
When the market is relatively stable or the company does not want to enter it with
a low commitment such as exporting, the company could choose to license their
products or brand name. With this the company get a higher commitment than
with exporting, they avoid high risk entry modes such as joint venture, but still the
benefit will be relatively high. Licensing could be seen as the solution when a
company expands but have no large financial resources for the subject, or when
the company lacks time with a higher commitment.
P 6: Healthcare companies have a low need to be locally represented, leading
them to choose a low cost and low market commitment entry mode.
4.5.4 Consumer Discretionary
The Consumer Discretionary sector tends to be the most sensitive industry to
economic cycles. A large part of the consumer discretionary sector involves retail
52
and companies with focus on business to consumers. The manufacturing segment
includes household durable goods, textiles and leisure equipment.
In the Consumer Discretionary sector the brand name is a high specific asset.
Williamson (1980) refers to this as brand name capital (Williamson, 1991). In this
industry consumers emphasise the value of brand name and recognition. By this
the most favourable mode of entry should imply a high commitment. This results
in a contractual or an investment entry mode. With a higher commitment comes
higher risk but also higher control. Since companies in this industry are depended
on brand name and that it is has a good reputation control is desirable.
In this industry it could be assumed that the production knowledge is more
significant than the actual selling of the product. To the customers the formation,
design and features of the product are important and what decides which product
the customers prefer. The actual selling is not equally important as in industries
with more contact between the customer and the company’s sales person. With
this, the producing company could chose to either use an investment mode to get
total control of the whole value chain, or to franchise the products and let the
franchisee be responsible for the sales.
P 7: Companies in the consumer discretionary industry tries to build and create
FSA by using a high commitment entry mode.
Companies in the consumer discretionary sector that is active on more than their
home market needs to change their concept when entering a new market. It could
imply everything from changing commercial approach and publicity to colours
and formation of the products. Consumers in different countries have different
tastes and preferences. For the companies in the consumer discretionary sector
this could not be neglected. This implicates the way in which a company could
enter a new market, resulting in a higher risk mode of entry (Hill, 2007).
Johansson and Vahlne (1977) found that companies favour export to markets with
a low physical distance from host country, and as the distance increases the entry
mode involves a higher commitment and risk. In today’s fast moving world and
53
with the consumer discretionary industry this might not be applicable. The
companies often have best knowledge about markets closer to their own but this is
not always the case, information is much easier to assess. To increase the
knowledge of new markets the best way is to be active on the market (Johanson
and Vahlne, 1977).
To be active on many different markets means that the companies strive for a
multi-domestic strategy. The best way to succeed with this strategy is by a
contractual or investment mode (Hill, 2007). History has shown that companies in
this sector favours to franchise their product and market idea, or to set up an own
subsidiary. The eclectic paradigm theory refers to this as localisation advantages
that when high a company should use a higher control entry mode (Dunning,
1980).
When companies are being locally represented on many markets the risk become
higher than when using an exporting mode. The options for the company becomes
to franchise their product and let somebody outside the company set up a store
and bare the most risk, or set up a store by joint or sole venture.
P 8: Companies in Consumer Discretionary have a need be locally represented to
satisfy consumers’ different tastes and preferences.
4.5.5 Industrials
The Industrials sector includes companies which are dominated by manufacturing
and distribution of capital goods, construction, engineering and building products,
electrical equipment and industrial machinery. The industrial sector is the largest
industry with a wide spread of companies. When analysing this industry it is
impossible to assume a favoured entry mode without dividing it into two separate
parts: Building and Manufacturing. The reason is the difference in how the
companies reach the customers and expand their operations. However, the first
proposition is about the whole industry.
Companies in the Industrial sector have a specific knowledge in how to produce
and manufacture their products. The products are often very technically advanced
54
and require a great knowledge and experience in the production process. When
this is the case, a company would prefer to use the knowledge internally. The
company could decide to export or invest depending on the need of local
responsiveness. According to Dunning (1980), when ownership and
internalisation advantages are high the chosen mode of entry depends on the need
of localization (Dunning, 1980). It is on this point that the building and
construction are different.
P 9: Companies in the industrial sector have a high specific knowledge in
production which they prefer to use internally, by export or sole venture
Building In the building industry it is important to be active on the host market. The
interview with a former location manager from a Swedish building company,
Skanska, provided some aspects to what affects the sector. There are often
different laws and rules in the new market that have an impact and are significant
to companies in this industry. To be aware of the rules, avoid and take advantage
of them, a company needs to be active on the market. Another impact on the
building industry is the company´s reputation. To receive contracts on the new
market a good reputation is necessary. A way to show commitment and take
control of the company´s reputation is to be active on the market. This would
imply an investment entry mode or a joint venture (Lindgren, 2007).
P 10: Companies in the Building Industry sector need to realize location
advantages, which lead to an investment entry mode.
Fisher and Ranasinghe (2001) investigated the preferred entry mode of building
companies in Singapore. Since the most commonly used entry mode in the
building industry is joint or sole venture, the purpose of the investigation was to
see which specific entry mode is most used. The result indicated a tendency for
joint venture as foreign market entry mode (Fisher and Ranasinghe, 2001).
Manufacturing The difference between the building and manufacturing industry lies within the
use of the FSA. While the building industry often has no material product or a low
55
value-to-weight ratio, the manufacturing often has a high value-to-weight ratio.
This would lead to a favouring of an exporting mode. An interview with the CEO
of a relative small manufacturing company of industrial goods strengthens the
argument. In their company the most used mode of entry was export since they
have no large financial resources and does not need to be locally represented
(Hammarlund, 2007).
Another important aspect of the companies in the manufacturing sector is the
chance to realize location economies and economies of scale. When a company
has a global strategy it would be preferred to manufacture the goods at one
optimal location and export everything from that location (Hill, 2007).
P 11: Companies in the Manufacturing sector have a low need to be locally
represented as it is profitable for them to export.
In works by Jones et al. (1992) and Young and Hood (1992) it has been proved
that export is primarily used in the manufacturing industry (as referred to Wheeler
et al. 1996). Wheeler et al. (1996) state that “the industry is primarily an export-
oriented one related to factors such as the predominance of small and medium-
sized manufacturers in the sector (and therefore limited resources) and the
specialist, niche markets served by these producers (meaning low sales volumes)”
(Wheeler et al. 1996 p 44).
4.5.6 Service
The service segment includes hotels, restaurants, leisure facilities, media services,
and consumer services. Another part of the service sector is commercial services
and supplies which include employment, environmental and office services. In the
service industry no material product exist and this impact the decision process on
which entry mode to choose.
Companies in the service sector have a high FSA in know-how, and the industry
is influenced by the human factor. It is knowledge that is of great value to the
company, and the company would prefer to keep it under control. The option to
export is often lost to companies in the service industry since they have no
56
material product. The service industry differs from the other industries in the way
it engage a buyer involvement, and a high degree of interaction between the client
and the service provider.
Since the specific asset in service companies lies within the employees or the way
the company engage in business the financial resources of the firm are not that
leading. With the impact of internet a service could be performed from one place
and often without a location or shop, which result in an even smaller dependence
on financial resources. However, when a company is not internet-based the
service cannot be performed without contact. Since the service industry engage in
an activity between the buyer and seller, the company needs to be represented in
the market. When smaller firms enter a new market they could be assumed to
strive for an entry mode with a lesser risk, such as franchising. Firms that are
larger and have more financial resources could be assumed to chose an entry
mode with higher commitment such as a joint venture or sole venture.
(Ramaswami, 1992).
P 12: The service must be adjusted to the local preferences, which increase the
need of local representation of service companies.
To perform a service is often not that complicated and demands not as much
financial resources or specific asset as to produce for example capital goods. In
addition, to start up a company in the service industry demands not that much
capital. This means that the competition on the service industry might be more
though than in other industries. To decrease the accompanied risk of entering a
new market the firm could let another company use the know-how. In addition,
the actual service can be used externally with low risk since the knowledge is
relatively easy to duplicate. With this, a contractual entry mode would be
preferred. Hill (2007) state that franchising is most used in the service industry
(Hill, 2007)
P 13: Service companies have a FSA that could be contracted at low risk, leading
to a preferred contractual entry mode.
57
However, to increase the commitment and control a company would favour an
investment mode. Anderson and Gatignon (1986) came to the solution that “Entry
modes offering higher degrees of control are more efficient for products
customized to the user” (Anderson and Gatignon, 1986 p 12). A service could be
seen as a customized product and with that an investment mode would be
preferred.
4.5.7 Transportation
Transportation services include airlines, couriers, marine, road and rail and
transportation infrastructure. Two of the largest areas in the transportation
industry are airline services and logistics. These two are very different industries
but have some similarities when it comes to the choice of entry mode.
It is relatively easy to start a company in the logistic industry, and it does not
require large resources. This has lead to existence of several small transportation
companies. We have interviewed an executive at one of the largest logistic
companies in the world. He explained that there are 8-10 really large companies in
this industry and several small companies. That is why it is often profitable to
acquire companies in other countries when entering that market. As these
companies often are small and can be acquired at low costs, it is often more
profitable than to make a Greenfield investment. When there is a low cost
possibility to choose an investment entry mode, it is often preferred as it
maximizes the control for the acquiring company (Söderberg, 2007).
Transportation industry performs services. The companies transport goods or
people from one place to another. Their FSA are know-how, experience,
organisational skills and brand name. As they do not have any physical product, it
is difficult for them to export. They also have trouble to license and franchise their
FSA. As the person we interviewed said “the only real choices we consider are
joint venture or sole venture” (Interview 3).
As transportations affect other partners and companies greatly it is important that
everything goes smoothly when they are performing their service. A wrong or
delayed delivery can be costly both financially and for the reputation. It is also
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fairly easy to perform the actual transportation. That is why it is important to a
transportation firm to keep the estimated time of arrival of delivery and a low
complaint rate. It is therefore important for companies in the transportation
industry to have high control over their partners. This motivates an investment
entry mode (Söderberg, 2007).
P 14: Transportation companies have a need to control their FSA, and a low cost
incentive to use an investment entry mode.
Transporting goods and people all over the world from A to B imply high
transportation costs. It is expensive to transport products long distances, and
especially when it is a long distance only to arrive at A. When having subsidiaries
on many markets, and being locally active on many markets the transportation
costs will be decreased. In addition, it increases the knowledge about the new
market and how to approach the customer. Moreover, to set up negotiations and
deal with contracts also is time consuming and increase the transaction costs. By
using an investment entry mode the transaction costs decreases (Interview 3).
The transportation industry involves several people. The decision making process
is often long. It is common that the transportation company hire a carrier to
perform the actual transportation. As mentioned, the brand name and reputation is
very important in this industry. In order to secure that the firm’s reputation do not
get damaged, companies try to cut the negotiation costs. As our interview person
tells us, historically it was common with joint ventures in the transportation
industry. But in time companies became untrustworthy and cancelled their
undertakings on short notice in order to negotiate new terms. The industry has
overcome these kinds of situations by entering markets through sole ventures
(Söderberg, 2007).
P 15: To lower transportation and transaction costs the companies have a high
need to be represented on local markets.
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4.5.8 Information Technology
The Information Technology (IT) sector covers a number of businesses. It
contains technology software and services, companies that provide information
technology consulting and services, technology hardware and equipment, and
semiconductors and semiconductor equipment manufacturers.
The IT sector is an extremely technology based industry. The FSA are know-how
and especially technology. According to Dunning (1980), Anderson and Gatignon
(1986) and other well known researchers it is preferred to have a high control over
such FSA. Companies in the IT sector should then favour an investment entry
mode.
P 16: Companies in the IT sector have high specific assets in advanced technology
and special know-how, leading them to desire high control.
However, companies in the IT sector are often small entrepreneurial companies
with high FSA but with small financial resources and often low international
experience. As sole venture often are very expensive it is assumedly not the most
common entry mode in this industry. The IT industry has some similarities with
the healthcare industry. Large financial resources are invested in the development
of new and technology advanced products. As mentioned earlier, the higher a
company´s research and development expenditures are the higher the extent of
licensing is (Anderson and Gatignon, 1986). To compensate the risk with R&D,
the companies can choose an entry mode with lower risk. The companies have the
possibility to use the knowledge both internally or externally. The products often
a have a high value to weight ratio which favours an exporting mode. However,
they also often have patents on their products which make it possible for them to
license it.
IT companies do not have a great need of being locally represented. As many IT
companies are internet based or at least use the internet when serving new
markets, they can be based on one specific location and yet serve a wide market.
They also often have their customer support on the internet which further reduces
the incentives to have foreign operations. This means that they do not need to
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engage in a sole or joint venture. This minimise the risk and the level of
commitment.
P 17: The companies in the IT sector can reach their customers by using modern
technology and their need to be represented in local markets is low.
4.5.9 Energy
The Energy sector consists of companies with a focus on constructing or
provisioning of oil rigs, drilling and other energy related services and equipment.
It is also companies engaged in the exploration, production, refining and
transportation of oil and gas products, coal and other consumable fuels.
Companies in this sector are often very large, and could be assumed to have high
financial resources. It is also an industry that consists of a small amount of
companies, with a close connection to an oligopolistic market.
Companies in the energy sector have a very specific asset in the firm. It is the
know-how and knowledge possessed within the company. When the FSA are high
the need to keep the knowledge within the company gets higher. This would lead
to an entry mode with higher control and naturally higher risk, an investment
entry mode (Dunning, 1980).
The Energy sector has a special product, by many consumers it could be seen as
the companies provide a service. It is possible to export and transport the products
but it is not profitable long distances, this due to the value-per-weight ratio.
History has shown that many countries purchase their oil from bordering
countries, and that energy companies enter new markets with a high commitment.
It is also a product that is hard to use externally, franchising or licensing the
product is hard. To reach the resources and to grow financially an investment
entry mode would be preferred.
P 18: Companies in the Energy sector have a high FSA and will tend to use it
internally by an investment entry mode.
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The energy and materials sector is closely connected when it comes to the
production of its products. In both industries it is very important to realize
location advantages. In the energy sector it involves control of the natural
resources to produce for instance electricity or to pump oil. As mentioned on the
Materials sectors, these resources are often present in specific geographical areas
and therefore the companies need to be active on that market to control them.
Dunning states that when the local advantages are high a company should prefer
an entry mode with higher commitment and risk, such as joint or sole venture
(Dunning, 1980).
Another aspect is the importance of being locally represented on the new market
to gain the trust of customers, and to sell the product. It is also important to
receive valid information about the new market, and this is possible when a
company is active on the market.
P 19: To control natural resources and increase commitment, companies in the
energy sector have a high need to be represented on local markets.
4.6 Conclusion
After analysing each industry we have shown how different factors affect
companies in the industry. To show which entry mode is the most common in the
different industries, we present them graphically in the model below:
Degree of firm specific assets (in relation to other industries) Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Finance
TransportMaterial
Consumer Discretionary
IT
Health Care
Industrials - Manufacturin
Industrials - Building
Level of CommitmentService
Energy
Figure 4.2: The Industry Internationalisation model with industries
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Chapter 5: Empirical method ________________________________________________________ In chapter 5 the method for the empirical research will be explained. This will
include the research strategy, the data collection method and the sample. Further,
we will discuss the questionnaire, the operationalization and the data analysis. At
the end of this chapter we will have a discussion about the validity and reliability.
5.1 Research strategy
To be able to build a new model an extensive amount of literature was reviewed.
With the help of the literature we created propositions. These propositions then
became the framework of our new model. To test these propositions an empirical
study was conducted. The result should determine if our propositions were valid
in order to prove the applicability of our model. Our dissertation is deductive in its
nature since we developed a theory and proposition and designed a research
strategy to test the propositions (Saunders et al. 2007).
The research strategy that was most suitable for the requirements of our
dissertation were a survey since it is easy to collect a large amount of data and
easy to compare and analyse. We created a questionnaire that we sent out to our
sample group. The questionnaire gathered data that allowed for easy comparison.
A survey was also an appropriate choice of research strategy for us concerning the
time and financial constraints associated with a bachelor dissertation. Some
disadvantages arise with a survey when you are only able to put a limited number
of questions on a questionnaire. According to Saunders et al. (2007) the
willingness of participating in a survey is dependent upon the number of questions
and the time participants have to spend to answer. In a survey the research will
either confirm the developed theory or reject it. If the theory is rejected it would
need to be adjusted.
Our survey was conducted through an on-line questionnaire. An advantage with
using a questionnaire is that it is possible to investigate a large sample in an quick
and economical way (Saunders et al. 2007) We built our own web site,
www.modeofentry.com, were we posted the questionnaire. Posting a
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questionnaire on the web site is a quicker way for the respondent to answer then a
document with an attached file that needed to be returned. Further, the
respondents could remain anonymous.
We contacted the companies by e-mail where we presented ourselves and the
purpose and aim of our research (see appendix1). With the e-mail we hoped to set
a friendly tone which would hopefully increase the response rate since it is
normally low in these kinds of surveys.
5.2 Data collection method
Primary and secondary data are the two types of data considered in theory.
Secondary data is data that is already collected and available from other sources.
Secondary data for our dissertation where found on the Internet, in books and in
established business journals. We used the secondary data found to get a
theoretical background of the internationalisation theories. Primary data is created
through the accomplished research (Saunders et al. 2007). We obtained primary
data through the questionnaire posted on the web site. In addition, we conducted
interviews with persons from the manufacturing, transport and building industry.
The interviews were performed in an unstructured way, through telephone or in
person. From the interviews we received data that strengthen our propositions
about the industry. For more information about the interview in detail see
references.
5.3 Sample selection
The purpose of our study was as we stated before to see if there are any
differences in industries choice of entry mode. To attain the information we
needed to collect data, the sample would have to represent companies in different
industries. The companies also needed to be on or have plans to enter foreign
markets. Further, the companies could not be too big and complex since they often
operate in many markets were they possibly choose different entry modes when
entering a market. Since we asked the companies about the industry in general, the
answers would not be a reflection of their own strategy.
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In order to accomplish the desired results we chose 266 companies on the
Swedish stock market as our initial sample. The companies are based on the Mid
cap, Small cap and the First North stock market. We believe these companies to
be aware of what would be the best way for them to enter a new market. At the
same time we believed them to be small enough for us to get in touch with
someone within the companies that would be capable of answering our questions.
Time and financial constraints forced us to choose companies that are based only
on the Swedish stock market. Since we wanted to get results that could be
generalized a very large sample was needed but the limitations of time and
financial resources compelled us to reduce the sample. The e-mail we sent to the
companies was send to a person high up in the hierarchy, such as the CEO or the
CFO.
5.4 The Questionnaire
As mentioned earlier, we chose to gather the information needed through a
questionnaire. The importance of constructing the questionnaire in an appropriate
way could not be neglected. The respondents needed to understand the questions
in the way intended for the results to be valid. Further, we had to interpret the
answers in the right way. We used familiar terms in the questions and considered
the wording carefully to avoid misunderstandings. We posted the questionnaire on
the web site in both Swedish and English since some managers may not be of
Swedish origin, this will hopefully reduce any translation mistakes from the
participants.
An advantage with a questionnaire is that it is possible to investigate a large
sample, in our case 266 companies, in an easy and economical way. On the other
hand a questionnaire also has disadvantages and risks when used in a survey. The
researcher does not know who is answering the questionnaire. (Saunders et al.
2007) Since one of managers most valued resources is time they might let
someone else answer, to the best of his or hers knowledge. Another risk is of
course that the participants lie because they do not want to share confidential
knowledge.
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5.5 Response rate
Our sample consisted of 266 companies that are based on the Swedish stock
market. We sent an e-mail (see Appendix1) to each of those companies, asking
them to participate in our survey. Seven of the e-mails did not reach the intended
address resulting in a delivery notification (failure) which means that the e-mail
did not reach the intended address. 259 e-mails reached their intended address. Six
of the firms (2.3%) that answered the e-mail said that they did not want to
participate in the survey. We got 82 answers on our questionnaire resulting in a
response rate of 31.7%. (See table 5.1 below).
Table 5.1: Results of the questionnaire
Non-
respondents
Answered that they would not participate in
the survey
E-mail delivery failure
Participants Total
number of E-mail sent
Number of E-mail
receivers
Number of firms 171 6 7 82 266 (266-7) =
259
Percentage of total sample
66.0% 2.3% 31.7% 100%
We did not know what response rate to expect since all the companies are public.
Sending the e-mail personally to one person at each company probably increased
the will to participate in the survey. After putting some extra effort into
formulating the e-mail we are satisfied with the response rate.
5.6 Operationalization
With the help of literature and articles we set out trying to create a new
internationalisation model. The purpose was to create a model that can explain the
differences in the choice of entry mode between industries. We then reviewed
what we believed to be the most important models that explain companies’
internationalisation process. As mentioned earlier the models we chose were: The
Uppsala model, the TCA model, and the Eclectic paradigm. We then studied these
models in detail in order to find what we believed to be the most important factors
explaining companies’ choice of entry mode. In addition, we formed three factors
that we believed influenced companies’ choice of entry mode. The factors we
chose when creating a new model were: degree of FSA, need of local
66
representation, and how the companies use the specific asset. Since we were going
to test our model through a survey we had to limit the number of factors to those
previously mentioned in order to keep it simple and applicable. With the help of
the factors we created propositions and a new model.
We tried to measure and test our model quantitatively by using a questionnaire.
Operationalization specifies the way in which a concept is to be measured
quantitatively (Saunders et al. 2007). The questionnaire starts with dividing the
companies into different industries. The second question is used to divide the
companies into categories based on how many employees they have. The two first
questions are used to divide the companies into different groups of industry and
size. Question 3 asks the participant to answer which mode of entry they presume
to be most commonly used in their industry. We used the three first questions to
divide the companies into industries and which mode of entry they believed to be
most commonly used in their industry. We then needed to find out what made
companies enter a new market in a certain way. With this in mind we asked one
question from each factor influencing the entry mode selection according to our
model.
The last three questions in the questionnaire tries to pin-point each company´s
answer into the new model. If our propositions and questions are correct they will
correspond with the results from the survey. Questions 4 and 5 are designed as
scale questions, where the respondents answer what they believe to characterize
their industry. The scale in question 4 and 5 ranges from very low to very high.
Question 4 ask the participants how important they believe it is to be locally
(physically) present on a new market. Question 5 asks the companies how
important they believe the FSA in their industry to be in comparison to other
industries. The last question divides the companies into two groups, those who
use their FSA internally and those who use the assets externally. All the questions
in the survey are designed to test the model we created. In the next chapter you
will get the results and analysis of our survey and the answer if our model and
proposition corresponds with the results. Each industry will begin with a table
over the participants in that specific industry and show the result of the previous
mentioned questions.
67
5.7 Analysis of the material
The response rate of the survey was important when it came to analyse the
questionnaire. Since the respondents became divided into subcategories we did
not have an enough data to analyse the questionnaire statistically in each industry.
However, in the industries that had a higher response rate we calculated the mean
value, median and standard deviation. Each industry was analysed separately by
using three figures: the first figure is a table that show all participants in the
specific industry, the second figure is the industry internationalisation model with
clusters of the chosen entry modes and where the industry is located in the model,
the third figure is the model again but this version is with each participating
company located in the model depending on their result of the questions in the
questionnaire. In addition, with each figure comes a discussion about the result.
5.8 Validity & Reliability
According to Saunders et al. (2007) you need to pay particular emphases on two
parts of the research design, validity and reliability, in order to reduce the risk of
getting the answers wrong. An example of this is that problems often arise when
you evaluate a developed theory through empirical testing and then transfer the
results into reality. What this means is that you may get a distorted picture of the
reality if the questions are hard to operationalise. To understand the meaning of
validity and reliability it will now be discussed further.
5.8.1 Validity
For research to be good it needs to be characterized by high validity. A problem is
that even though we believe our questions to measure what we want them to
measure we cannot be sure. There is always a risk that a question can be wrongly
formulated or misleading. This is why the validity of the research is so important.
Validity examines the causal relationship between two variables and shows if the
findings are what they appear to be. The design of the questions, how the
questionnaire is structured and how rigorous the pilot test is are all important
factors how high the validity will be (Saunders et al. 2007). As mentioned earlier
we put a lot of effort into the design of the questionnaire, few and easy to
understand questions were of great importance. We did a pilot test before sending
the questionnaire to our sample group. The pilot test sample group consisted of
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managers we knew, in different industries. The pilot test sample group all agreed
that the questionnaire was formulated in a good way and the questions were easy
to understand.
5.8.2 Reliability
For research to be reliable the result of an operationalization will have to yield the
same results during a re-test under similar conditions. Reliability refers to
consistency (Saunders et al. 2007). The reliability of your questionnaire will be
low if the respondents consistently interpret a question one way, when you mean
something else. To prove the reliability of the research a re-test would be
necessary.
In our research we asked questions about managers’ thoughts about their industry.
Since no manager knows everything about their industry the results may be
misleading. When formulating questions like the ones in our questionnaire we ask
of a certain person’s opinion. The managers’ opinion may change due to different
circumstances. We tried to formulate the questions in a neutral way so that we did
not influence the answers. Another way to increase reliability is internal
consistency. Internal consistency involves correlating the responses to each
question in the questionnaire (Saunders et al. 2007). Our questionnaire does not
have correlating questions, so our research does not have internal consistency.
Therefore internal consistency has not been used to increase reliability in our
research. Another way to increase the reliability is check-questions. The problem
with check-questions is that they need to be somewhat equivalent to the other
questions, increasing the length of the questionnaire. We decided not to increase
the length of the questionnaire with check-questions because it affects the
response rate.
Participant bias is a threat to reliability. If the participant lies the reliability of the
research will be lower. This kind of threat is very hard to avoid but if you
guarantee full anonymity, like we did in our questionnaire, the respondents have
no reason to lie. In order to reduce misunderstandings due to language barriers, we
sent the e-mail in both Swedish and English. The participants also had the choice
to answer the questionnaire in either Swedish or English.
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Chapter 6: Analysis ________________________________________________________ In chapter 6 each industry will be analysed separately. By using the results from
the questionnaire and comparing it to the propositions we will statistically see if
the propositions and the industry internationalisation model are working. At the
end of this chapter we will have a final presentation of the model and if it had to
be configured.
6.1 Introduction
After reviewing theories, and having analysed each industry separately according
to the industry internationalisation model it is now turn to test the model on
companies. Each industry will be analysed from the three basis of the industry
internationalisation model: firm specific assets (FSA), internal/external use of
FSA and need of local representation. The analysis will contain three figures:
• A table over all participating companies in each industry, the number of
employees in the company, how each company graded (from 1-7) the FSA
and need of local representation in each industry, and finally which entry
mode the company presume to be the most used in the industry and
which entry mode the industry internationalisation model predicted.
• A model showing the industry internationalisation model and where the
specific industry is located in the model, and a spot for which entry mode
the companies in the industry presumed to be the most used, without
regard of their answer on degree of FSA.
• A model showing the industry internationalisation model and where each
company is located according to the grading over FSA and need of local
representation in the industry. In addition it shows a symbol for which
entry mode the company presume to be most used in the industry with the
question if it matches the grading for FSA and need of local
representation.
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A comparison will be made between the predicted and actual results from the
questionnaire. Further, the result will then be discussed and if it is right according
to the model and the assumed reasons if the result deviates. The chapter will be
summarised by a final presentation of the industry internationalisation model with
the actual results of all industries.
6.2 Finance From the participants in our survey there was only one company that belonged to
the finance industry. The data we got is not sufficient to do any valid generalized
conclusion for the finance industry but we will analyse our propositions anyway.
As mentioned earlier, the financial sector could be categorized to have high FSA.
To be able to keep the FSA in-house the firm needs to use their assets internally.
Financial companies’ answers can be seen in the table below:
Table 6.2.1: Result from the finance industry
Company Employees Internal/External use of FSA
Degree of firm specific
assets
Need of local representation Predicted entry mode Actual
entry mode
1 4 Internal 4 1 Joint Venture/Sole Venture
Joint Venture
The company that answered the questionnaire believe that companies in the
finance sector use their FSA internally. This corresponds with our first proposition
that financial companies will tend to use their FSA internally and choose an
investment entry mode.
In the model on the next page you can see the answers of the participants, in the
actual choice of entry mode. The models show which entry mode the companies
choose and which entry mode we predicted. Notice that we take no consideration
of how high or low their FSA and their need for local representation are. We only
show graphically which entry mode they chose.
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Degree of firm specific assets (in relation to other industries) Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Figure 6.2.1: The predicted/actual entry mode in the finance industry
As mentioned in chapter 4, were we discuss the financial sector, customers often
choose a bank that is represented on the home market. From the customers point
of view it is about commitment, security and trust. To be close to customers
companies tend to use an investment mode as we mentioned in proposition two.
The firm that answered our questionnaire believe joint-venture to be the most
commonly used entry mode in the finance sector, so far it corresponds with our
propositions. A question arises when the firm answer that the need for local
representation is very low. This contradicts our second proposition. The problem
is that we need more data to be able to draw any conclusions.
The second model on the next page shows the participating companies degree of
FSA and their need of local representation. In the model you can see which entry
mode that the company should choose according to our model and theories. The
colours show what their actual entry mode was.
Finance
Level of Commitment
72
Internal use of FSA External use of FSA Internal use of FSA
Figure 6.2.2: The suggested/actual entry mode in the finance industry
As mentioned earlier the firm answered that they believed the need for local
representation is very low in the finance industry. We do not believe this is the
case for the finance sector but we do not have more data to confirm it and cannot
state that our analysis of the finance industry is valid.
We can conclude the analysis of the finance industry by noticing that the industry
internationalisation model does not explain how companies in the finance industry
enter new markets. The respondent’s answer on the industries’ degree of FSA and
need of local representation should result in a low commitment entry mode,
according to the model. However, the sample is too small to create any valid
conclusion. Our predicted entry mode for the financial industry was a high
commitment entry mode which proved to be the case.
6.3 Material
When analysing the material industry we found a close connection to the energy
sector. The materials sector has a high need to control the supply of natural
resources in order to produce the output, for instance in this case the access to
mines and forest. As mentioned earlier, the companies in the material industry is
Level of Commitment
73
assumedly of large size and has large financial resources since it is a capital-
intense industry. Since the companies in this industry have a need to control the
supply of resources, and the presence of natural resources often are in specific
geographic areas, an investment entry mode would be preferred, as we stated in
proposition three. In addition, we stated that it was a product that was unprofitable
to export long distance due to low value-to-weight ratio. Material companies’
answers can be seen in the table below:
Table 6.3.1: Result from the material industry
Company Employees Internal/External use of FSA
Degree of firm specific assets
Need of location representation
Predicted entry mode
Actual entry mode
1 14 Internal 6 7 Sole Venture Export
2 5 Internal 7 2 Sole Venture Joint Venture
Both companies that participated in our research are small considering the number
of employees. In addition, both companies stressed the importance to use their
FSA internally. This choice is reflected in the entry mode which the companies
presumed to be most used in the industry; both export and joint venture are entry
modes that keep the knowledge within the company. However, a joint venture
enables some partners to use the FSA. In the propositions on the material industry
we clarified that it was important to use the FSA internally, however the
companies would prefer to use an investment entry mode since we found the
exporting option unprofitable at long distances (proposition four).
In the model on the next page you can see the answers of the participants, in the
actual choice of entry mode. The models show which entry mode the companies
choose and which entry mode we predicted. Notice that we take no consideration
of how high or low their FSA and their need for local representation are. We only
show graphically which entry mode they chose.
74
Degree of firm specific assets (in relation to other industries) Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Figure 6.3.1: The predicted/actual entry mode in the material industry
The model clearly shows that the industry internationalisation model is not
applicable on the materials industry, at least not these two companies. The second
model shows the participating companies degree of FSA and their need of local
representation. In the model you can see which entry mode that the companies
should choose according to our model and theories. The colours show what their
actual entry mode was. Internal use of FSA External use of FSA Internal use of FSA
Material
Level of Commitment
Level of Commitment
Figure 6.3.2: The suggested/actual entry mode in the material industry
75
In this figure above you get a clear view that the companies are each other’s
opposites. Company 1 states the importance of local representation and then
presume that export is the most used entry mode in the industry, which contradicts
the industry internationalisation model. On the other hand, company 2 states that
it is not so important to be locally represented in the materials industry while the
company presumes that joint venture is most used in the industry. This also
contradicts the industry internationalisation model. If the two companies were to
change places the model would have motivated their answers.
However, only one of the companies that participated in our survey confirmed the
propositions. Since the company that presumed the importance of local
representation in the material industry stated that export is most used in the
industry there is something that differentiate.
We can conclude the analysis of the material industry by noticing that no clear
answers were given. The industry internationalisation model is not applicable to
the material industry, at least with our respondents. Clearly there are other, more
important factors that affect companies in the material industries’ choice of entry
mode. However, our proposition on the high FSA in the industry proved to be
accurate but the importance of local representation was not confirmed. Notice that
the sample was too small to make any valid conclusion.
6.4 Healthcare
As we stated earlier in chapter 4, the healthcare industry is very research and
development focused. It is a capital intense industry to operate in, with high
financial risk. The uncertainty of the research projects are high and it is difficult to
evaluate the financial outcome of an investment. We predicted that companies in
the healthcare industry would try to decrease their overall risk by preferring a low
commitment entry mode. We suggested that if it was possible that the companies
should get a patent on their products and license it. If not, they should consider
export as entry mode. Out of 82 participants in the survey, 5 of them belong to the
healthcare industry. Their answers can be seen in the table below:
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Table 6.4.1: Result from the healthcare industry
Company Employees Internal/External use of FSA
Degree of firm specific
assets
Need of local representation
Predicted entry mode
Actual entry mode
1 5 Internal 7 2 Export/Licensing Export 2 100 External 7 1 Export/Licensing Licensing 3 90 External 7 2 Export/Licensing Licensing 4 19 External 5 4 Export/Licensing Licensing
5 30 Internal 2 7 Export/Licensing Sole Venture
The companies that participate were small to medium sized companies in terms of
the number of employees. The FSA was high and the need of local representation
was relatively low. This confirms our propositions about the healthcare industry.
However, company number 5´s answers were opposite to the results of the other
companies. As a majority of the participants preferred a low commitment entry
mode such as export and licensing, it strengthens our propositions.
In our first proposition we declared that companies in the healthcare industry had
high FSA. As it is an expensive industry connected with a high level of risk, we
argued that they would try to decrease their overall risk and choose a low risk
entry mode. As we can see in the table, a majority of the companies chose a low
risk entry mode like export and licensing. The results also show that companies in
the healthcare industry consider themselves to have a high degree of FSA.
In the model on the next page you can see the answers of the participants, in the
actual choice of entry mode. The models show which entry mode the companies
choose and which entry mode we predicted. Notice that we take no consideration
of how high or low their FSA and their need for local representation are. We only
show graphically which entry mode they chose.
The model shows that we thought that healthcare companies would prefer export
or licensing depending if they choose to use their FSA internally or externally.
The model clearly shows that a majority have chosen export or licensing.
77
Degree of firm specific assets (in relation to other industries) Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Figure 6.4.1: The predicted/actual entry mode in the healthcare industry
The second model shows the participating companies degree of FSA and their
need of local representation. In the model you can see which entry mode that the
companies should choose according to our model and theories. The colours show
what their actual entry mode was. Internal use of FSA External use of FSA Internal use of FSA
Figure 6.4.2: The suggested/actual entry mode in the healthcare industry
Healthcare Level of
Commitment
Level of Commitment
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Companies 1, 2 and 3 have high FSA and low need of local representation. They
should, according to our model, prefer an entry mode with low commitment. We
can see that they have chosen export or licensing which is a low commitment
entry mode. Company four consider the industry to have a medium degree of FSA
and a medium need of local representation. They have chosen franchising and it
seems to be a well motivated choice according to our model but they could also
choose to partially use their FSA internally by a joint venture. Company number 5
believed that local representation is very important and have chosen a sole
venture. It is motivated in the model since companies with a high need for local
representation should choose a high commitment entry mode.
We can conclude the analysis of the healthcare industry by noticing that the
industry internationalisation model work relatively well when it describes
healthcare companies’ entry mode. A majority choose the predicted entry mode,
as the second model showed, the companies choose an entry mode that matched
their degree of FSA and their need of local representation. This can arguably be
translated to that the factors in the model helps to explain healthcare companies’
choice of entry mode.
6.5 Consumer Discretionary
We discussed earlier that companies in the consumer discretionary sector have a
FSA in brand name. In proposition 7 we state that the companies should try to
build and create FSA by using a high commitment entry mode. Another important
aspect in the consumer discretionary industry is the need to be locally represented
on new markets in order to satisfy costumers’ different preferences (proposition
8). From the participants in our survey 10 companies belonged to the consumer
discretionary industry. In the table on the next page we can see what the firms
answered in our survey. An interesting observation is the two firms that believed
licensing and franchising to be the most commonly used entry mode in the
consumer discretionary sector. They believe that an internal use of FSA is most
common in the industry. The company that chose licensing did not believe that the
industry has a high degree of specific assets in comparison to other industries.
They believe licensing to be the most common way to enter new markets.
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Table 6.5.1: Result from the consumer discretionary industry
Company Employees Internal/External use of FSA
Degree of firm specific assets
Need of location representation
Predicted entry mode
Actual entry mode
1 370 Internal 7 7 Franchise / Joint Venture Export
2 400 Internal 7 4 Franchise / Joint Venture Export
3 286 External 7 3 Franchise / Joint Venture Export
4 25000 External 7 7 Franchise / Joint Venture Export
5 3500 Internal 1 1 Franchise / Joint Venture Licensing
6 3500 Internal 4 7 Franchise / Joint Venture Sole Venture
7 20 Internal 1 1 Franchise / Joint Venture Sole Venture
8 3500 Internal 6 6 Franchise / Joint Venture Sole Venture
9 1400 Internal 6 6 Franchise / Joint Venture Sole Venture
10 5000 Internal 7 7 Franchise / Joint Venture Franchising
As we can see in table 6.5.1 a majority of the respondents chose to use the FSA
internally. This corresponds with their choice of entry mode. We predicted that
companies should chose franchising or a joint venture which leads to external
partners using their FSA. The degree of FSA in the industry seems to be higher
than expected which can motivate some companies’ choice of a high commitment
entry mode. We also notice that it is a wide range of company sizes amongst the
respondents but it does not appear to influence the entry mode choice. We can see
that six of the ten participants answered that they believe a contractual or an
investment mode to be most commonly used entry mode. But only four out of
these six firms believe it is important to have local representation.
Since we have a larger sample, we can provide some statistical analysis of the
industry (see table 6.5.2).
Table 6.5.2: Statistical analysis of the consumer discretionary industry
Degree of firm specific assets
Need of local representation
Mean value 5,3 4,9 Median 6,5 6
Standard deviation 2,45 2,47
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Table 6.5.2 above shows that the mean value is 5.3 and median is very high, 6.5,
of the degree of FSA. This motivates the majority’s decision to use the FSA
internally. The need of local representation is also statistically high. As the
companies believe the need for local representation to be high, a high commitment
entry mode should be preferred. This is however not the case as there is a large
diversification between the respondents perceived entry mode. However, the
standard deviation is rather high in both variables, which can explain the large
difference between the companies’ perceived entry mode.
In the model on the next page you can see the answers of the participants, in the
actual choice of entry mode. The models show which entry mode the companies
choose and which entry mode we predicted. Notice that we take no consideration
of how high or low their FSA and their need for local representation are. We only
show graphically which entry mode they chose.
Degree of firm specific assets (in relation to other industries) Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Figure 6.5.1: The predicted/actual entry mode in the consumer discretionary
industry
In the model we can see that a majority choose to use their FSA internally. The
result is difficult to analyse whether it is important to be locally represented or
Consumer Discretionary
Level of Commitment
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not. The predicted entry mode is proven to be wrong. We thought that companies
should choose a high commitment entry mode but also choose to externally let
other companies use their FSA. This should result in a franchising or joint
venture. Our propositions proved to be partially wrong.
The model on the next page shows the participating companies degree of FSA and
their need of local representation. In the model you can see which entry mode that
the companies should choose according to our model and theories. The colours
show what their actual entry mode was.
Internal use of FSA External use of FSA Internal use of FSA
(Some of the respondents in the survey had the same answers, resulting in that they are illustrated on top of each other in the model above.) Figure 6.5.2: The suggested/actual entry mode in the consumer discretionary
industry
The industry internationalisation model shows that the majority of the respondents
believe a contractual or sole venture to be the most commonly used entry mode.
The firms who answered that high control entry mode is most used also believe
that a high degree of FSA and local representation is important. This corresponds
with the model. The company that believe franchising to be the most commonly
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used entry mode answered that the need to have local representation is very high.
A way to reduce risk when entering a new market is to franchise, and still getting
close to customers.
We can conclude the analysis of the consumer discretionary industry by noticing
that the industry internationalisation model work relatively well when it describes
the companies’ entry mode. A majority of the respondents chose an entry mode
that corresponds with their perceived need of local representation. It can be
assumed that location factor is an important influencing factor when analysing the
consumer discretionary industry’s choice of entry mode. This strengthens the
validity of our model.
6.6 Building Industry
When analysing the building industry we found that it was very important to be
locally represented on the new market, this due to different laws but also to take
advantage of natural resources. From the participants in our survey there were 10
companies that belonged to the building industry which answered our
questionnaire. Their answers can be seen in the table below:
Table 6.6.1: Result from the building industry Company Employees Internal/External
use of FSA Degree of firm specific assets
Need of local representation
Predicted entry mode
Actual entry mode
1 15 Internal 2 3 Joint Venture / Sole Venture Export
2 250 Internal 6 7 Joint Venture / Sole Venture Joint Venture
3 40 Internal 7 6 Joint Venture / Sole Venture Sole Venture
4 2000 Internal 5 6 Joint Venture / Sole Venture Joint Venture
5 900 Internal 7 7 Joint Venture / Sole Venture Sole Venture
6 225 Internal 4 5 Joint Venture / Sole Venture Sole Venture
7 6000 Internal 6 5 Joint Venture / Sole Venture Sole Venture
8 12 Internal 5 5 Joint Venture / Sole Venture Sole Venture
9 1700 Internal 5 6 Joint Venture / Sole Venture Sole Venture
10 40 Internal 1 1 Joint Venture / Sole Venture Sole Venture
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Of the 10 companies the diversification in number of employees was large. The
largest company had 6000 employees while the smallest company had only 12.
However, it does not seem like the number of employees affect the entry mode
decision in the building industry. When choosing how the companies in the
industry use their FSA, all companies answered that they would prefer to use it
internally. This answer corresponds with proposition 9 about the building industry
(industrial sector). We proposed in proposition 10 that it is important to be
represented locally in the building industry. When reviewing the result of the
survey it is clear that this is an accurate assumption. A majority of the respondents
answer that a high need for local representation is significant for the building
industry.
Since we have a larger sample, we can provide some statistical analysis of the
industry (see table 6.6.2.)
Table 6.6.2: Statistical analysis of the building industry
Degree of firm specific assets
Need of local representation
Mean value 4,8 5,1 Median 5 5,5
Standard deviation 1,99 1,85
Table 6.6.2 shows that the mean value and median of the degree of FSA is
approximately 5. This means that the degree of FSA is statistically relatively high.
This motivates the majority’s decision to use the FSA internally. The need of local
representation is statistically high, approximately 5. This also motivates the
decision to use a high commitment entry mode. According to our model and
survey, we can state that companies in the building industry are presumed to use a
well motivated entry mode.
In the model on the next page you can see the answers of the participants, in the
actual choice of entry mode. The models show which entry mode the companies
choose and which entry mode we predicted. Notice that we take no consideration
84
of how high or low their FSA and their need for local representation are. We only
show graphically which entry mode they chose.
Degree of firm specific assets (in relation to other industries)
Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Figure 6.6.1: The predicted/actual entry mode in the building industry
From this figure it is easy to see that the propositions and predictions from the
industry internationalisation model were right. The majority of the companies
stated that the most used entry mode in the building industry was joint or sole
venture, which was predicted. An exception was the company that presumed
export to be most used.
The second model shows the participating companies degree of FSA and their
need of local representation. In the model you can see which entry mode that the
companies should choose according to our model and theories. The colours show
what their actual entry mode was.
Industrials - Building
Level of Commitment
85
Internal use of FSA External use of FSA Internal use of FSA
Figure 6.6.2: The suggested/actual entry mode in the building industry
The majority of the companies in the building industry have answered that it is
important to be locally represented, and that joint venture or sole venture is most
preferred. The company which answered that it is not important to be locally
represented in the building industry but that sole venture was most used as entry
mode could be challenged. If it is not important to be locally represented in a
market an exporting entry mode would be favoured, according to the model. A
large majority choose an entry mode that well motivated by their degree of FSA
and need for local representation.
We can conclude the analysis of the building industry by noticing that the industry
internationalisation model work very well when it describes the companies’ entry
mode. A majority of the respondents chose an entry mode that corresponds with
their perceived need of local representation and their degree of FSA. It can be
assumed that location factor is an important influencing factor when analysing the
building industry’s choice of entry mode. These two factors appear to be very
influencing when building companies choose a foreign market entry mode.
Level of Commitment
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6.7 Manufacturing
From the participants in our survey there were 9 companies that belonged to the
manufacturing industry. In our discussion earlier about the industry we stated that
manufacturing companies have a high degree of FSA. What this means according
to our model is that they would prefer to use those specific assets internally. The
companies then have a choice of which entry mode to use, to export or to use an
investment mode. Using export or an investment mode keeps the firms specific
assets within the company.
Table 6.7.1: Result from the manufacturing industry
Company Employees Internal/External use of FSA
Degree of firm specific assets
Need of local representation
Predicted entry mode
Actual entry mode
1 1200 Internal 4 7 Export Export
2 3500 Internal 3 1 Export Export
3 100 Internal 4 1 Export Export
4 16 Internal 5 6 Export Joint Venture
5 10 External 7 7 Export Export
6 1000 Internal 6 7 Export Export
7 1350 Internal 6 6 Export Export
8 500 Internal 5 2 Export Export
9 102 Internal 6 5 Export Export
In table 6.7.1 we can see that eight of the nine manufacturing firms believe that
companies are internalising their FSA in this industry. This answer corresponds
with proposition 9 about the manufacturing industry (industrial sector). We
proposed in proposition 11 that it is not important to be represented locally in the
manufacturing industry. When reviewing the result of the survey it is clear that
this is not an accurate assumption, even though our interview person in this
industry argued that there is a low need of local representation. A majority of the
respondents answer that a high need for local representation is significant to
manufacturing companies.
Since we have a larger sample, we can provide some statistical analysis of the
industry (see table 6.7.2 on the next page).
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Table 6.7.2: Statistical analysis of the manufacturing industry
Degree of firm specific assets
Need of local representation
Mean value 5,1 4,7 Median 5 6
Standard deviation 1,27 2,60
Table 6.7.2 shows that the mean value and median of the degree of FSA is
approximately 5. This means that the degree of FSA is statistically relatively high.
This motivates the majority’s decision to use the FSA internally. The need of local
representation is statistically high. This contradicts with the decision to use a low
commitment entry mode, in this case export. As the companies believe the need
for local representation to be high, a higher commitment entry mode should be
preferred. However, the standard deviation is rather high which can explain their
choice of an exporting entry mode.
Our proposition state that companies in the manufacturing industry should choose
an export entry mode. When we look at the results from our survey we can see
that the answers correspond very well with our proposition. Eight out of nine
manufacturing companies believe that an exporting mode would be most
commonly used in their industry. Only one out of nine companies believed
another entry mode, joint venture, to be more commonly used.
In the model on the next page you can see the answers of the participants, in the
actual choice of entry mode. The models show which entry mode the companies
choose and which entry mode we predicted. Notice that we take no consideration
of how high or low their FSA and their need for local representation are. We only
show graphically which entry mode they chose.
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Degree of firm specific assets (in relation to other industries) Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Figure 6.7.1: The predicted/actual entry mode in the manufacturing industry
From this figure it is easy to see that the proposition and predictions of the
industry internationalisation model were right for the manufacturing industry. The
model predicted that manufacturing companies would use exporting as an entry
mode. In the figure we can see a clear cluster were firms chose what they believed
to be most commonly used entry mode in their industry, namely export.
The model on the next page shows the participating companies degree of FSA and
their need of local representation. In the model you can see which entry mode that
the companies should choose according to our model and theories. The colours
show what their actual entry mode was.
Industrials -Manufacturing
Level of Commitment
89
Internal use of FSA External use of FSA Internal use of FSA
Figure 6.7.2: The suggested/actual entry mode in the manufacturing industry
According to our model the company that chose joint venture believed that FSA
and local representation was important, placing them at the investment entry mode
side of the model. We said that the manufacturing companies would prefer to keep
their FSA in-house. In our model we can clearly see that is the case. What the
model cannot explain is why some companies believe local representation to be
important when they answer that the most commonly used entry mode is export.
We can conclude the analysis of the manufacturing industry by noticing that the
industry internationalisation model does not fully explain how companies in the
manufacturing industry enter new markets. The respondent’s answer about the
industries’ degree of FSA and need of local representation should result in a high
commitment entry mode, according to the model. Our predicted entry mode for
the manufacturing industry was a low commitment entry mode which proved to
be the case, by the choice of actual entry mode.
6.8 Service
We argued earlier in chapter four when we presented our propositions that the
service industry had their FSA in know-how, management- and organisational
skills. We noticed that they did not have a material product to sell which makes it
Level of Commitment
90
difficult for them to export and license. Of course they can “export” their skills for
other companies to implement but we consider that type of entry mode to be
equally to franchise. Many companies in the service sector like McDonalds and
Starbucks, to name some, have successfully engaged in franchising and we
believed that to be one of the most common and preferred entry modes in the
service industry. Out of 82 respondents in the survey, 6 of them belong in the
service industry. Their answers can be seen in the table below.
Table 6.8.1: Result from the service industry
Company Employees Internal/External use of FSA
Degree of firm specific assets
Need of location representation
Predicted entry mode
Actual entry mode
1 2000 Internal 5 7 Franchising / Joint Venture Joint Venture
2 900 Internal 6 6 Franchising / Joint Venture Joint Venture
3 20 Internal 5 5 Franchising / Joint Venture Sole Venture
4 16000 External 5 7 Franchising / Joint Venture Sole Venture
5 110 Internal 3 5 Franchising / Joint Venture Sole Venture
6 3000 Internal 6 7 Franchising / Joint Venture Sole Venture
As we can see in table 6.8.1 a large majority of service companies believe that
companies are internalising their FSA in the industry. This answer does not
correspond with proposition 13 about the service industry, in which we argued
that service firms should prefer to use their FSA externally. We proposed in
proposition 12 that it is important to be represented locally in the service industry.
When reviewing the result of the survey it is clear that this is an accurate
assumption. A majority of the respondents answer that a high need for local
representation is significant to manufacturing companies. From the result above it
is clear that the number of employees in the company, and with that company
size, has no influence on the entry mode decision.
In the model on the next page you can see the answers of the participants, in the
actual choice of entry mode. The models show which entry mode the companies
choose and which entry mode we predicted. Notice that we take no consideration
91
of how high or low their FSA and their need for local representation are. We only
show graphically which entry mode they chose.
The model shows that we thought that service companies would prefer licensing
or joint venture depending if they use their FSA internally or externally. The
model shows that all companies have chosen a high commitment entry mode.
Degree of firm specific assets (in relation to other industries) Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Figure 6.8.1: The predicted/actual entry mode in the service industry
From this figure it is easy to see that the propositions and predictions from the
industry internationalisation model were wrong. The majority of the companies
stated that the most used entry mode in the service industry was joint or sole
venture, which was partly predicted. However, we argued that service companies
would favour a contractual entry mode.
The model on the next page shows the participating companies degree of FSA and
their need of local representation. In the model you can see which entry mode that
the companies should choose according to our model and theories. The colours
show what their actual entry mode was.
Service Level of
Commitment
92
Internal use of FSA External use of FSA Internal use of FSA
Figure 6.8.2: The suggested/actual entry mode in the service industry
All companies answered that local representation is important in the service
industry. They also consider the degree of FSA to be medium to high in relation to
other industries. This corresponds with our predictions that the need of local
representation is high because the need to diversify the product or service to the
local taste and preferences is important. We also argued that the degree of FSA is
medium to high, which can be seen in the first model above. However, we
thought that service companies preferred to use their FSA externally in order to
keep costs a lower level. Clearly we can see that this was not the case. All
companies chose to use their FSA internally with either a sole venture, as the
majority did, or to partially use their FSA externally to a small number of partners
in a joint venture.
We can conclude the analysis of the service industry by noticing that the industry
internationalisation model work very well when it describes service companies’
entry mode. A large majority of the companies choose an entry mode that
matched their degree of FSA and their need of local representation. This can
Level of Commitment
93
arguably be translated to that the factors in the model helps to explain service
companies’ choice of entry mode. However, our predicted entry mode was wrong.
6.9 Transport We discussed that companies in the transport industry often are small to medium
sized companies. Their FSA are in know-how, experience, organisational skills
and brand name. We believed that they would prefer a high commitment entry
mode, such as joint venture and sole venture. If the company had large financial
resources, they would prefer a sole venture in order to minimize the risk that a
joint venture brings. Out of 82 participants in the survey, 4 belong to the transport
industry. This is unfortunately a small number of respondents which makes it
difficult to analyse this industry. The result of the analysis may not be reliable to
the whole industry. Their answers can be seen in the table below:
Table 6.9.1: Result from the transport industry
Company Employees Internal/External use of FSA
Degree of firm specific
assets
Need of local representation
Predicted entry mode
Actual entry mode
1 20 Internal 5 1 Joint Venture /Sole Venture Export
2 300 External 7 2 Joint Venture/ Sole Venture
Joint Venture
3 21 Internal 7 2 Joint Venture / Sole Venture
Sole Venture
4 4000 Internal 7 7 Joint Venture / Sole Venture
Sole Venture
The companies that participated had very diverse answers. Two companies were
small sized, one medium sized and one large sized company in terms of the
number of employees. The result was somehow surprising as the FSA was very
high and the need of local representation was low. We predicted the opposite with
medium degree of FSA and a high need of local representation. Company number
4 however, answered that the need of local representation was high, which we
stated in proposition 15. Despite the low need of local representation, three
companies chose a high commitment entry mode. According to the eclectic theory
that we presented earlier, if the need of local representation is low, then
companies should choose an entry mode with lower risk.
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In proposition 15 we also stated that it was easy to acquire companies in the
transport industry since it consists of several small companies. That should give
the larger companies an opportunity to choose an investment entry mode to a
relatively low cost. As we can see, two of the companies choose an investment
entry mode. We also proposed that if a company did not possess high financial
resources, they should prefer another high commitment entry mode such as joint
venture. The table shows that 3 respondents choose sole venture or joint venture.
However, as the majority of the companies do not believe that it is important to be
represented locally, it does not correspond with the chosen entry mode.
In the model on the next page you can see the answers of the participants, in the
actual choice of entry mode. The models show which entry mode the companies
choose and which entry mode we predicted. Notice that we take no consideration
of how high or low their FSA and their need for local representation are. We only
show graphically which entry mode they chose.
Degree of firm specific assets (in relation to other industries) Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Figure 6.9.1: The predicted/actual entry mode in the transport industry
The model shows that transport companies would prefer joint venture or sole
venture depending largely on their financial resources. The model shows clearly
Transport
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95
that a majority have chosen joint venture or sole venture. Unfortunately the
“majority” consists of only three companies so the result is not valid.
The second model shows the participating companies degree of FSA and their
need of local representation. In the model you can see which entry mode that the
companies should choose according to our model and theories. The colours show
what their actual entry mode was.
Internal use of FSA External use of FSA Internal use of FSA
(Some of the respondents in the survey had the same answers, resulting in that they are illustrated
on top of each other in the model above). Figure 6.9.2: The suggested/actual entry mode in the transport industry
All companies have high FSA. However, companies 1, 2 and 3 have low need of
local representation. They should, according to our model, prefer an entry mode
with low commitment. This means that company 1 has chosen an entry mode that
is appropriate, according to our model. Company 2 and 3 however, have chosen
joint venture and sole venture which is not in accordance with their answer as they
believe that local representation is not important in the transport industry.
Company 4 have chosen sole venture and this is appropriate considering their
need of local representation and their high FSA.
Level of Commitment
96
We can conclude the analysis of the transport industry by noticing that the
industry internationalisation model fails to explain the choice of entry mode for
the transport industry. The sample group was too small for the result to be valid. It
is clear that companies in the transport industry choose an entry mode based on
other factors than in our model. Otherwise the companies should not have chosen
a joint venture or sole venture since their need of local representation was low.
However, our prediction that the transport companies would prefer a high
commitment entry mode was accurate but evidently not the reasons why.
6.10 Information Technology
From the participants in our survey there were 16 companies that belonged to the
Information Technology (IT). The IT sector covers a number of businesses and is
an extremely technology based industry. The FSA are know-how and especially
technology. In table below we can see what the IT firms answered in our survey:
Table 6.10.1: Result from the IT industry
Company Employees Internal/External use of FSA
Degree of firm specific
assets
Need of local representation
Predicted entry mode
Actual entry mode
1 550 Internal 6 3 Export/Licensing Export
2 500 Internal 7 5 Export/Licensing Export
3 170 Internal 6 7 Export/Licensing Export
4 550 Internal 6 7 Export/Licensing Export
5 1300 Internal 4 4 Export/Licensing Export
6 70 External 5 6 Export/Licensing Joint Venture
7 550 External 4 7 Export/Licensing Joint Venture
8 105 Internal 1 1 Export/Licensing Joint Venture
9 20 Internal 7 5 Export/Licensing Joint Venture
10 95 Internal 5 6 Export/Licensing Joint Venture
11 40 External 6 5 Export/Licensing Joint Venture
12 15 Internal 1 1 Export/Licensing Joint Venture
13 15 External 6 2 Export/Licensing Sole Venture
14 31 Internal 5 5 Export/Licensing Sole Venture
15 170 Internal 4 7 Export/Licensing Sole Venture
16 150 Internal 6 6 Export/Licensing Sole Venture
We can see in table 6.10.1 that 12 of the 16 IT firms believe that companies are
internalising their FSA in the industry. This result corresponds with proposition
97
16 about the IT industry, in which we argued that IT firms should prefer to use
their FSA internally and under control. In addition, the companies´ answer on the
most common way to use their FSA in the industry correspond relatively well
with the actual entry mode. We proposed in proposition 17 that it is not important
to be represented locally in the IT industry. When reviewing the result of the
survey it is clear that this is an inaccurate assumption. A majority of the
respondents answer that a high need for local representation is significant to IT
companies. From the result above it is also obvious that the number of employees
in the company, and with that company size, has no influence on the entry mode
decision. That is, larger firms with larger financial resources should tend to invest.
From the 16 participants in the survey all but two answered that they believe it is
important to have a medium or high degree of FSA. Eleven of the 16 IT firms
answered that they believe that high level of control entry mode, joint and sole
venture, would be most commonly used. The result fits our model in a good way.
Since we have a larger sample, we can provide some statistical analysis of the
industry (see table 6.10.2.)
Table 6.10.2: Statistical analysis of the IT industry
Degree of firm specific assets
Need of local representation
Mean value 4,9 4,8 Median 5,5 5
Standard deviation 1,81 2,07
Table 6.10.2 shows that the mean value and median of the degree of FSA is
statistically high. This motivates the majority’s decision to use the FSA internally.
This also confirms our proposition. In addition the need of local representation is
statistically relatively high. This motivates the majority’s decision to use a high
commitment entry mode. However, there are five companies that believe that
export is the most common entry mode in the IT industry. This does not correlate
with their perception about the need for local representation and their high FSA.
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In the model on the next page you can see the answers of the participants, in the
actual choice of entry mode. The models show which entry mode the companies
choose and which entry mode we predicted. Notice that we take no consideration
of how high or low their FSA and their need for local representation are. We only
show graphically which entry mode they chose.
Degree of firm specific assets (in relation to other industries) Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Figure 6.10.1: The predicted/actual entry mode in the IT industry
Since companies in the IT sector are often small entrepreneurial companies with
small financial resources and often low international experience, not all
companies in the IT sector should favour an entry mode with high level of control.
A high control entry mode might be too expensive and risky. The products in the
IT sector are often patented or have a high value-to-weight ratio.
From the 16 firms that participated in the survey five companies answered that
exporting would be the most commonly used entry mode for the IT industry.
There is a significant distinction between the firms when it comes to number of
employees. Our arguments that IT firms often are small and should favour a low
commitment entry mode contradict the results of the survey. The big firms with
many employees believe export to be the most commonly used entry mode. The
Information Technology
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99
small firms with fewer employees believe that a joint or sole venture is the most
commonly used entry mode. This is a very interesting result that can be examined
with further studies. Proposition 17 derived from a discussion that IT companies
have a low need of being locally represented, since they use technology to serve
their customers. Many IT companies are internet based or at least use the internet
when serving new markets, they can be based on one specific location and yet
serve a wide market. This reduces the need to engage in a sole or joint venture. If
we look at the result from the survey we find that there are only three firms that do
not believe local representation to be important. The interesting thing about the
answers of these three companies is that they all believed joint and sole venture to
be the most commonly used entry mode. This contradicts with our model.
The second model shows the participating companies degree of FSA and their
need of local representation. In the model you can see which entry mode that the
companies should choose according to our model and theories. The colours show
what their actual entry mode was.
Internal use of FSA External use of FSA Internal use of FSA
(Some of the respondents in the survey had the same answers, resulting in that they are illustrated on top of each other in the model above.) Figure 6.10.2: The suggested/actual entry mode in the IT
Level of Commitment
100
In the figure we can see that 14 of 16 companies believe that the IT industry has
high specific assets compared to other industries. A question arises when the five
companies that chose export as an entry mode also believe that it is important to
be represented locally. The IT sector might be too complex to analyse all
companies together.
We can conclude the analysis of the IT industry by noticing that the industry
internationalisation model work relatively well when it describes IT companies’
entry mode. A majority choose an entry mode that matched their degree of FSA
and their need of local representation. This can arguably be translated to that the
factors in the model helps to explain IT companies’ choice of entry mode.
However, our prediction that IT companies would prefer a low commitment entry
mode was inaccurate.
6.11 Energy
When analysing the energy sector we found a close connection to the materials
sector in producing the products. Both industries have an importance of being
where the natural resources are. For companies in the energy sector it is also
important to be close to the customers. In our survey there were three participants
that belonged to the energy sector and the following table shows their result:
Table 6.11.1: Result from the energy industry
Company Employees Internal/External use of FSA
Degree of firm specific assets
Need of location representation
Predicted entry mode
Actual entry mode
1 133 Internal 7 6 Joint Venture / Sole Venture Joint Venture
2 40 Internal 5 3 Joint Venture / Sole Venture Joint Venture
3 7 Internal 5 4 Joint Venture / Sole Venture Joint Venture
There is a large difference in the number of employees in the three companies.
Even so, all companies chose that joint venture was most used in the energy sector
which could reflect that the size of the company does not affect the entry mode
decision. When answering which way companies in the energy sector use their
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FSA all three companies chose internal. This means that the information and
know-how should stay in the company, and when choosing joint venture, as all
companies have done, the information is kept relatively secure within the walls of
the company. This corresponds with proposition 18 that energy companies would
prefer to use their FSA internally.
As mentioned in proposition 19, it is important in this industry to be locally
represented on a new market to control the natural resources. In the model on the
next page you can see the answers of the participants, in the actual choice of entry
mode. The models show which entry mode the companies choose and which entry
mode we predicted. Notice that we take no consideration of how high or low their
FSA and their need for local representation are. We only show graphically which
entry mode they chose.
Degree of firm specific assets (in relation to other industries) Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Figure 6.11.1: The predicted/actual entry mode in the energy industry
It is easy to see the result from the propositions in the figure compared to what the
respondents presumed to be the most used entry mode in the industry. All
participating companies stated that the most used entry mode in the energy sector
was joint venture, which was predicted together with a sole venture.
Energy
Level of Commitment
102
The model below shows the participating companies degree of FSA and their need
of local representation. In the model you can see which entry mode that the
companies should choose according to our model and theories. The colours show
what their actual entry mode was.
Internal use of FSA External use of FSA Internal use of FSA
Figure 6.11.2: The suggested/actual entry mode in the energy industry
In this figure we see how the companies relate the FSA in the energy industry to
other industries, and the need of local representation. One of the companies
matches how the industry internationalisation model predicted the need of local
representation. While the other two companies better match the FSA which was
predicted. Again we can see that all three companies presumed that joint venture
is most used in the industry, however we assumed that the need for local
representation was higher.
We can conclude the analysis of the energy industry by noticing that the industry
internationalisation model works relatively well when it describes energy
companies’ entry mode. All companies chose the predicted entry mode and as the
second model showed, the companies choose an entry mode that matched their
Level of Commitment
103
degree of FSA. However, the need of local representation was a bit lower than
predicted.
6.12 Conclusion/Summary
After reviewing the analysis of the result from the survey, the industry
internationalisation model needed some configuration. In chapter four we created
an initial model that illustrated which entry mode we believed to be most common
in the different industries. This model was based on our propositions and analysis
of the different industries. The result from the survey indicated that the factors
from our model affect some industries to a different extent than we first
anticipated. Below we show the initial industry internationalisation model with
the industries at their original position:
Degree of firm specific assets (in relation to other industries) Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Figure 6.12.1: The initial Industry Internationalisation model
We will present the key conclusions from our analysis for each industry. We will
then configure the model so that it reflects the reality in a better way. As we
discussed in the previous analysis section, some industries entry mode could not
be described by only using the factors in the industry internationalisation model.
However, we found that the factors were very influencing in some industries’
Finance
TransportMaterial
Consumer Discretionary
IT
Health Care
Industrials - Manufacturin
Industrials - Building
Level of Commitment Service
Energy
104
choice of foreign market entry mode. We found that especially the need for local
representation was a good factor to analyse in some industries.
Finance: The industry internationalisation model does not explain how
companies in the finance industry enter new markets. The sample was too
small to create any valid conclusion. Our predicted entry mode for the
financial industry was proved to be right. The degree of local
representation was lower than expected.
Material: The model is not applicable to the material industry. The result
shows that there are other factors that are more important to these
companies. The sample was too small to make any valid conclusion. The
respondents’ answers contradicted one another. This leads to that we do
not change the material industries’ place in the final model
Healthcare: The model is relatively applicable when it describes
healthcare companies’ entry mode. Especially the need of local
representation factor works well in analysing the healthcare industry. The
high FSA could favour exporting instead of licensing. A majority choose
the predicted entry mode.
Consumer discretionary: The model explains relatively well this
industry’s entry mode. A majority of the respondents chose an entry mode
that corresponds with their perceived need of local representation. The
location factor seems to be an important factor when analysing this
industry’s choice of entry mode.
Building: The model describes the building industry’s entry mode very
well. A majority of the respondents chose an entry mode that corresponds
with their perceived need of local representation and their degree of FSA.
Both these factors seem to be important when analysing the building
industry’s choice of entry mode.
105
Manufacturing: The model does not explain how companies in the
manufacturing industry enter new markets. The respondents’ answers
should result in a high commitment entry mode. Our predicted entry mode
proved to be the right but the model fails to explain it.
Service: The model describes the service companies’ entry mode very
well. A large majority of the companies choose an entry mode that
matched their degree of FSA and their need of local representation. These
factors appear to be important influencing factors when analysing service
companies’ choice of entry mode. However, our predicted entry mode was
wrong.
Transport: The model fails to explain the choice of entry mode for the
transport industry. Transport companies choose an entry mode based on
other factors than the ones in our model. However, our prediction that the
transport companies would prefer a high commitment entry mode was
accurate but evidently not the reasons why.
IT: The model explains the IT companies’ entry mode relatively well. A
majority choose an entry mode that matched their degree of FSA and their
need of local representation. These factors can be seen as good factors to
analyse the IT industry’s choice of entry mode with. However, our
prediction that IT companies would prefer a low commitment entry mode
was inaccurate.
Energy: The model works relatively well when it describes energy
companies’ entry mode. The companies choose an entry mode that
matches their degree of FSA. The FSA factor seems to influence the
industry’s entry mode decision. The location factor does not influence this
industry as much as predicted. However, all companies chose the predicted
entry mode.
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Below we present the final industry internationalisation model in which we have
corrected the industries’ different perceived entry mode. To summarise we can
argue that the need of local representation works well in describing several
industries´ choice of foreign market entry mode.
Degree of firm specific assets (in relation to other industries) Internal use of FSA External use of FSA Internal use of FSA
Need of local representation
Figure 6.12.1: The final Industry Internationalisation model
Finance
Transport
Material
Consumer Discretionary
IT
Health Care
Manufacturing
Building Level of Commitment
Service
Energy
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Chapter 7: Conclusion ________________________________________________________ In chapter 7 the dissertation will be summarised. The applicability of the industry
internationalisation model is discussed. In addition, criticism to the methodology
will be presented together with modifications, practical implementations and
future research.
7.1 Summary of the dissertation
This dissertation focuses on the internationalisation of companies, which mode of
entry companies’ use when entering a new market, with a focus on industries. The
research on industries´ choice of foreign market entry mode is neglected in the
internationalisation research. There are researchers that acknowledge differences
between some industries, but we believe that a comprehensive model is lacking.
The purpose of this dissertation was to analyse the most acknowledged theories on
internationalisation and develop a model that can be tested on companies to see
the applicability. We found that there are three schools of economics on
internationalisation. We decided to study one theory in each school and the
following theories was reviewed:
• The Uppsala Internationalisation model: a firm gradually extends their
activities abroad over time and as knowledge develops, and with that the
physical distance to markets increases (Johanson and Vahlne, 1977).
• Transaction Cost Analysis: focus is on the costs of a foreign market entry
mode comparative to its objective (Anderson and Gatignon, 1986).
• The Eclectic Paradigm: the advantages in the organisation, its location and
internationalisation influence the choice of entry mode (Dunning, 1980).
Since we believe that the Eclectic Paradigm is the theory that explains the
internationalisation process the best, it influenced the development of the industry
internationalisation model. However, all theories were a base for the development
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of our model. The purpose of the model is to explain industries´ entry mode
decision. The explanatory factors in the model are the degree of firm specific
assets, degree of local representation and how the company use the firm specific
asset. If a company has a high specific asset, and a need to be locally represented
on a new market, the company should select an entry mode with higher
commitment so that the knowledge will stay within the company. When a
company has no need to use the FSA internally, it could use it externally, as in
licensing or franchising. When the need of local representation is low, the
company would prefer an exporting entry mode, with this the knowledge still
stays within the company. Together with the industry internationalisation model
we created propositions about each industry that could explain their view on firm
specific asset, degree of local representation and how to use the firm specific
asset.
To test the model, and with that the propositions, we conducted an internet-based
survey. The purpose of the survey was to see if the model was working and if it
could explain the entry mode decision of industries. The participants were
contacted through an e-mail with a link to the web site www.modeofentry.com
where they could find and fill out the questionnaire, but also find information
about the dissertation and its authors. Our sample consisted of 266 companies on
the Swedish stock market. It was small- and medium-sized companies that
belonged to the Small Cap, Mid Cap and First North on the stock-exchange list.
We received no answer from 171 companies. Six companies answered that they
chose not to participate. 82 companies participated in the survey which is a
response rate of 31.7 %. The result of the survey will be presented in the next part.
7.2 Applicability of the model
The industry internationalisation model has three parts, the degree of firm specific
assets, the need of local representation and how the company use the firm specific
asset, internally or externally. The result shows that all these three parts are
important when explaining industries´ choice of foreign market entry mode. Even
though our research indicated that all parts influence the entry mode decision, one
part was more decisive than the other.
109
Our result showed that local representation seemed to be most applicable and
influencing. However, not all results on this part were significant. The majority of
the industries chose an entry mode which corresponded with the actual entry
mode. Even though the predicted entry mode was not always the result, the
industries´ choice of foreign market entry mode was often well motivated. It was
also interesting to see that in industries that we believed to have a low need of
local representation corresponded well with the actual entry mode.
The research indicated that the degree of firm specific assets was higher than we
first expected. When reviewing the results we clearly see that a majority of the
answering companies predicted a higher degree of FSA than expected. This could
depend on various reasons, but we believed that it was difficult for the companies
to understand what we meant by FSA. In addition, it could be incorrect to expect
that a company has self-perception about the industry in relation to other
industries, which was a large part with our approach
We also discussed that a company could use its FSA in two ways, internally and
externally. In addition, what the company choose should affect the entry mode
decision. From the result on this part we received a higher feedback than
expected. A clear majority of the answers indicated that that the right entry mode
was chosen according to our model. We stated that when a company use its FSA
internally it could choose between an exporting or investment entry mode. The
result indicated a great significance between how the company use its FSA and
the chosen entry mode.
To summarise, our survey indicated that the industry internationalisation model
can be relatively valuable when trying to explain industries´ choice of foreign
market entry mode. A large part of the industries were explained very well by the
model, in some industries the choice of entry mode was partly explained, and in
some industries the model did not work that well. Please keep in mind that a
larger sample and a higher response rate in each industry could increase the
applicability. In addition, the majority of the propositions about the industries
were correct.
110
7.3 Modifications
We reviewed a lot of articles and theories on the subject of foreign market entry
mode before creating the industry internationalisation model. There exists a large
amount of research, and the majority are developments and extensions of the most
acknowledged theories. Our purpose was to develop a model that could explain
and was comprehensive for all industries. Since we were most influenced by
Dunning´s Eclectic paradigm and the influence of ownership, location and
internalisation on the entry mode decision we made a model with the same
approach. When having only three influences on the entry mode decision it is easy
to assume that we fail to see other important influences. However, when trying to
make a comprehensive model, too many influences make the model ambiguous.
Our research indicated that not all industries´ entry mode decision could be
explained by the industry internationalisation model. However, on some industries
the model seems to be applicable. The size of the sample could explain the
incorrect results. In addition, how we operationalised the proposition could have
affected the result. A different type of questions and information gathering could
also have lead to another result. It is possible that a more profound research would
have given other answers.
When analysing the results of the questionnaire we made a comparison between
the industries. Since all industries are not the same and they use different
technology, some are more capital-intense than others and some have a high need
to be where the resources are, it could be wrong to compare them with each other.
It may have been better to focus on a smaller sample of industries that is more
equal and compare their results and entry modes. The propositions and
assumptions we created were probably correct based on the research we made,
however a more extensive research may have resulted in other propositions. It is
possible that with a modified questionnaire and with another analysis, the validity
could be improved.
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7.4 Methodological criticism
Our research was conducted by reviewing three well-known theories of
internationalisation and a survey. The questions in our survey made it possible to
test the industry internationalisation model and if it could explain how industries
internationalise. We made an internet-based questionnaire since we thought it
would increase the number of participants and the response rate, and we got a
relatively high response rate. However, by conducting the survey in this way we
may have lost important information which could have been received when
performing a deeper interview with representatives of a particular company. With
a deeper interview we could also make sure that the participants understood the
questions and alternatives in the survey, which we cannot be sure they did with
the questions on the internet. By having a discussion with more people from
different companies we could have received a deeper understanding of the factors
that influence them, which entry mode that is most used and so forth. When
having a number of interviews with representatives from one industry should have
resulted in a deeper understanding of that particular industry. However, this would
have taken much more time and since we tried to explain as many industries as
possible it would have not worked under the circumstances of this project.
It would also have been interesting to review a larger selection of theories on
internationalisation. Since there exist a large amount of theories and we only
chose to focus on the most acknowledged researches and one theory of each
school of economics, some important aspects and factors that influence industries
could have been lost.
Our sample consisted of small and medium-sized companies on the Swedish stock
market. When we received the result from the participants it was clear that it was
not an equal proportion of answers in each industry. It could also be assumed that
larger companies have another approach and thoughts about the entry mode
decision in the industry. Even though we neglected the larger firms since we did
not think they had any time or will to participate in our survey it would have been
good to get their reflection. This would assumedly also increase the response rate
in each industry, to get more statistical evidence if the industry
internationalisation model is applicable.
112
Due to the time constraint the companies that participated in the survey only had
approximately two weeks to answer the questionnaire. The companies received
the follow-up letter as early as a week after the first handout. If the survey was
conducted in an earlier stage in the process and under a longer period it would
have been possible to get more answers, and get a higher response rate in each
industry.
7.5 Future research
We have created what we call the industry internationalisation model with the
purpose to explain industries´ choice of foreign market entry mode. We conducted
a survey to test the model and received partial support on the model and our
research. The survey indicated that some industries could be explained by the
industry internationalisation model. Since the field of industries´ choice of foreign
market entry mode is relatively neglected we tried to analyse a wide range of
industries at the same time. It would be interesting to do further researches on the
subject. With our research as a foundation the following researches can be made:
• Our survey is conducted on small and medium-sized companies that might
have a different view on the subject than larger companies. Even though
we had a relatively high response rate it would have been more interesting
to do a larger survey and receive higher response rate in each industry.
• Something that we have encountered several times is the lack of depth in
the dissertation. It would be interesting to dig deeper and have focus on
one industry. This could result in additional influencing factors and a
deeper understanding.
• Since we only investigated Swedish companies it would have been
interesting to do a survey on companies in other countries, and see if there
is a pattern between industries across country borders.
113
• Naturally there are many more factors that influence the entry mode
decision than the ones in the industry internationalisation model. It would
have been interesting to develop another model on other factors and test it.
7.6 Practical implementations
The industry internationalisation model can function as a guide for companies and
people responsible of management for companies in the industries that was
explained by the model. It could be used as a good overall view for companies
regarding the need of local representation and how to use the firm specific asset.
In addition, it can work as a decision basis for which mode of entry to choose.
The model could also be used to analyse other companies in the industry, by
assuming which mode of entry the competitors would choose. Another way is to
use the dissertation in an educational purpose, when reviewing industries mode of
entry. It could also be used as a foundation for further research on the subject.
114
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Appendix 1: Letter and questionnaire
University of Kristianstad
Department of Business studies
291 88 Kristianstad
Dear Madams and Sirs
We know that your time is very valuable but we would really appreciate your
help. It will only take 4 minutes of your time. Thank you!
We are three students who are writing our Bachelor thesis for our International
Business studies at Kristianstad University in Kristianstad. The dissertation is
about which type of method Swedish companies prefer to use when they enter
foreign markets. We have created a new model that describes the
internationalisation process of Swedish companies. Through a statistical survey
we are going to test the validity of the model.
It is the survey we ask you to participate in. The questionnaire consists of 5 simple
questions that will take a maximum of 2 minutes to answer. We have posted the
questionnaire on our homepage www.modesofentry.com. We did this to guarantee
your full anonymity (you will not enter the name of your company).
Click on the link to go straight to the survey. www.modeofentry.com
We would like to thank you in advance for your time and consideration. If you
have any questions please do not hesitate to contact us.
Sincerely yours
Patric Hammarlund, David Hansson, Viktor Hansson.
Contact information: [email protected]
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The mode of entry survey Company information Question 1 Which industry does your company operate in?
□ Building
□ Consumer Discretionary
□ Consumer Staples
□ Energy
□ Financial
□ Health care
□ Information technology
□ Manufacturing
□ Material
□ Telecommunication Services
□ Transport
□ Service
□ Utilities
□ Other Question 2 How many employees does your company have? Internationalisation Question 1 Which mode of entry do you perceive to be the most used in your industry?
□ Export
□ Licensing
□ Franchising
□ Joint ventures / Strategic alliance
□ Sole venture
Question 2 How important do you believe it is to be locally (physically) present on the new
market in your industry?
Very low Very high Question 3 How important do you believe the firm specific asset in your industry is in relation to other industries? (E.g. strong brand name, valuable know-how, specialized products). Degree of firm specific asset: Very low Very high Question 4 How do companies in your industry use their firm specific advantage?
□ Use it internally (export and joint or sole venture)
□ Use it externally (franchise or license) Thank you very much for your participation in our survey. Your answer is of great value for our continued work with this study. The result and answers of this survey will be used for our bachelor dissertation only. We guarantee you full anonymity. To see the result of this survey when completed, please enter our web-site
www.modeofentry.com at the beginning of January 2008.